Need to Pay Estimated Income Taxes?

The IRS requires taxpayers to pay their income tax liability as their income is earned. States that charge income tax and the District of Columbia have similar rules. Employers withhold and remit income taxes to cover their employees’ tax liability on wages and other compensation. Job done. But taxpayers with non-compensation income like interest, dividends, capital gains, prizes and awards may have to make estimated tax payments to cover the related income tax liability.

Taxpayers with profits from self-employment must regularly assess their need to make estimated income tax payments, as well as other taxes such as the self-employment tax. “Regularly” means at least quarterly. All the necessary details about making payments, when and how much are at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

It’s a lot to read, so let’s boil it down to three important things to know:

  1. When are Estimated Taxes Due?

For estimated tax purposes, the year is divided into four quarters. Although some payment due dates changed temporarily due to COVID, estimated tax payments are generally due on April 15, June 15, September 15, and January 15 of the following year. If the payment due date falls on a Saturday, a Sunday, or a legal holiday, the payment is due the next business day.

  1. How Much Do You Need to Pay?

Estimated tax payments are based on estimated income and resulting tax liability. An estimated tax payment is due if the liability is at least $1,000, after subtracting withholding and refundable credits. Withholdings or estimated payments must equal or exceed the smaller of 90% of your 2021 tax liability, or 100% of your 2020 tax liability. Calculate your 2021 tax liability at this link https://www.irs.gov/forms-pubs/about-form-1040-es

  1. What if You Don’t Pay Enough?

Interest is due on any unpaid balance, accrued daily from the time the tax liability was created (i.e., by receiving income) until the tax is paid. Interest accrues daily, which can really add to your tax bill. Clearly, the IRS is serious about getting paid on time. Figure your 2021 federal income tax bill by using the IRS Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator.

Taxpayers who paid a lot when filing their 2020 income tax return and those who receive income with no tax withholdings should look at whether 2021 estimated income tax payments are needed. The IRS has all the tools to figure it out at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.