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IRS Estimated Tax Payments

Short Summary:

The whole point of making estimated tax payments is to avoid the underpayment penalty. Failure to make estimated tax payments can result in underpayment penalties because the IRS wants their money as you earn it throughout the course of the year.

Who is this most applicable to:

  • Independent Contractors
  • Self-Employed People
  • S-Corporation Owners
  • People with large investment income where no taxes are withheld

Explanation of Estimated Tax Payments

The primary objective of paying-in estimated tax payments is to avoid the underpayment penalty. If you send in too much as an estimated tax payment, you’ll have the excess refunded back to you at year-end when you do your tax return. But you generally don’t want to send in too much as an estimated tax payment, otherwise, you might have a cash-flow or cash-crunch issue. So it may be a difficult balancing act when determining the appropriate amount to send in because you don’t want to send in too little (and get penalized) and you don’t want to send in too much.

How much should I send in for estimated tax payments?

How much you should be sending in is unique to your situation. However, we’ll give you a rough guideline. Basically, you’re earning income where you have no taxes taken out. If you don’t send in estimated tax payments, you’ll probably have a large tax balance due at year-end when you file your taxes and you’ll most likely be charged interest and penalties based on the amount you owe and how much you should have been sending in throughout the course of the year.

A general guideline amount to send in to the IRS is 25%.

Here is why we say 25% as a general guideline… even if you’re in a low income tax bracket, for sole-proprietors and self-employed persons, the social security and medicare tax (self-employment tax) alone is 15.3%. Add-on a low percentage for federal income taxes and that should place you close to where you need to be, around 25%.

Let’s say you’re in a high income tax bracket, for sole-proprietors and self-employed persons, the social security and medicare tax (self-employment tax) drops down to 2.9% (from 15.3%) because you stop paying social security tax after your earnings exceed $132,900 (adjusted for inflation each year). So if you’ll be in a higher effective federal tax rate, in the 20-something percent range, then you add on the 2.9% and then around 25% sounds appropriate.

Based on this guideline, feel free to adjust downwards to 20% if you’re not impacted by self-employment taxes or if you’ll be in a really low tax bracket. Feel free to adjust upwards to around 30% if you’re in a higher tax bracket or you want to be more conservative with your amounts.

Where can I make these estimated tax payments?

You can make estimated tax payments online at the IRS website: https://www.irs.gov/payments/direct-pay

You can also make estimated tax payments by check and voucher.
Here’s the link for the vouchers to mail-in along with your check: https://www.irs.gov/pub/irs-pdf/f1040es.pdf

If applicable, don’t forget about state estimated tax payments as well!

Here are the links to make ES payments to some popular states:
California: https://www.ftb.ca.gov/online/webpay/index.asp
New York: https://www.tax.ny.gov/pay/ind/pay_your_estimated_tax.htm
Illinois: https://mytax.illinois.gov/_/

Due Dates:
Install 1 covers Jan/Feb/Mar and is due in April 15th (install 1 covers a 3 month period)
Install 2 covers Apr/May and is due in June 15th (install 2 covers a 2 month period)
Install 3 covers Jun/Jul/Aug and is due in September 15th (install 3 covers a 3 month period)
Install 4 covers Sept/Oct/Nov/Dec and is due January 15th (install 4 covers a 4 month period)

If the due date falls on a weekend or holiday, the due date gets pushed to the next following business day.