Why You Should Make Estimated Tax Payments

So – you’re here because you are thinking or have been told you need to make estimated tax payments? Most self employed individuals, including S Corporation owners, and many retired individuals find themselves needing to make estimated tax payments. 

Here are the benefits:

• Helps with Cash Flow, no big scary bill in April
• Helps keep your tax bill down, underpayment penalties are just more and unnecessary taxes to pay!
• Pay as you go, paying in regularly as income is realized helps so you know what you have left to invest elsewhere.

What are Estimated Taxes?

The U.S. Federal tax system is a “pay as you go” system. Back when you had a W2 job – you noticed that tax was withheld from each of your paychecks.  Self employed individuals and other non-wage income (such as investments and retirement) does not have a regular systematic way to withhold and remit your taxes for you, so the estimated tax payment quarterly system was developed. Fun fact: Even if you have withholding at your regular W2 job, but also have a side hustle, you may need to pay estimated taxes. Regular withholding generally doesn’t take other income into consideration.

Estimated taxes are not optional! If you are supposed to pay estimated taxes, and don’t, you are subject to penalties and interest from the IRS, which is really more tax on your taxes! When April’s tax day comes around, you will also have to make a sizeable payment that most people just aren’t prepared for. Depending on your situation, you may need to make a payment plan through the IRS, which means paying more interest, aka more tax. So in the end, making estimated tax payments helps to save you money. In some cases, if you pay too much and are due a large refund, the IRS will pay 4% interest on your money that they have been holding!

How do I know if I need to make estimated tax payments? 

Generally, individuals can expect to make estimated tax payments if you are planning to owe $1,000 or more when your tax return is filed at the end of the year.  If you have self-employed income, retirement income or investment income where there is no withholding, you will likely have an estimated payment requirement as well.   

Wondering if you can skip estimated payments this year?

If you meet ALL THREE of the following requirements, you are NOT required to make estimated payments and can settle up next April instead.

• You had no tax liability from the prior tax year (Line 24 of your tax return is $0 or less than $1,000, or you or your spouses withholding will be at least as much as line 24 on last year’s taxes or didn’t have any taxes due)
• You were a US citizen or resident for the entire year
• Your prior tax year covered a 12-month period

UNDERSTAND: YOU MAY STILL OWE TAXES. You just won’t need to make estimated tax payments.

Okay so huge surprise for many business owners- your business made a bunch of money last year- in April you come to find yourself with a BIG tax bill for last year- PLUS your first estimated tax payment for the current calendar year is due!  WHAT!?  How can they do that!? Yep.  This is a thing that catches so many taxpayers by surprise.

One way to prevent cash flow shock is to talk to your tax preparer about tax planning! Know what to expect ahead of time and be prepared.  We offer tax planning sessions to our clients to stay ahead of crippling unexpected tax bills.  With tax planning, you can preview what to have set aside for each deadline and breeze through all of the tax deadlines.

When are the estimated tax payment deadlines for 2023? 

Quarter 1 (Jan. 1 – Mar 31) – Due on or before April 15th

Quarter 2 (April 1 – May 31) – Due on or before June 15th

Quarter 3 (June 1 – Aug. 31) – Due on or before September 15th

Quarter 4 (Sept. 1 – Dec. 31) – Due on or before January 16th, 2024

Where & How do I make my Estimated Tax Payments? 

First things first, look at last year’s tax return to determine who is the primary taxpayer on your return (the first person listed on the tax return). The IRS can’t handle when estimated tax payments are made under the SSN of the person listed as “Spouse”.  Trust us, it’s a thing.  Be sure to make all of your estimated tax payments under the primary taxpayer’s SSN, even if it’s due to the “spouse’s” income that estimated payments are required.

You have a couple options for making your estimated tax payments. 

• Mail in a check with voucher 1040-ES. If Wasatch Accounting has filed your return, these will be located in the “2023 Estimated Payment Vouchers” package in the portal. 
• Make your payment online at: https://www.irs.gov/payments (recommended & preferred method)
  • NOTE: you can schedule your estimated payments any time to be automatically withdrawn from your bank account at each due date so you don’t have to remember to login and pay (you just have to make sure you have the funds ready). Do this for the whole year!

How do I know how much to pay?

When you file your taxes, often you are given estimated payment vouchers.  Many people wonder how we could possibly know how much you’ll make and what the payments should be, in short we don’t.  The payments you get with your tax return are considered “safe” minimum estimated taxes based on a formula from your prior year return.  The simplified method of the government’s guidelines for calculating this is to look at line 24 of last year’s taxes.  Then subtract the amount expected to be withheld through payroll.  Last divide the balance by 4 and you will have a pretty close “safe” estimated tax payment that will keep you from underpayment penalties.  Yep, if you want, you can calculate that part, that simply.  Now, you may still owe tax in April, but you shouldn’t be hit with underpayment penalties.

When we do tax planning, we recommend the following:  Make Q1 & Q2 payments based on safe estimate amounts.  Meet in late summer, assess where you are at, how you prefer to manage cash flow, and adjust Q3 & Q4 payments accordingly or keep making safe payments, and start saving for April.  There are different methodologies and preferences on cash flow management for business owners, so we go over all those options as part of our tax planning meetings.

I already make payments through payroll via my S corporation, do I still need to make estimated payments too?

Yes, is almost always the answer.  Typically S Corporation payroll for the shareholders/owners only covers a portion of your income and business profits. This means that only a portion of your income tax is being covered by your owner payroll. Additional estimated tax payments are necessary to compliantly cover your entire tax liability throughout the year.

Remember, your business doesn’t pay income tax.  The income “passes through” to you at a personal level and your income tax is paid there.  

Do I have to make estimated tax payments for my state taxes? 

It’s possible! Every state is different, and every state has their own due dates (though most match up with the federal due dates). If you work with us and have a requirement we let you know when we file your returns.

States also can have quirky rules, for example – California estimated tax payments are split over three quarters instead of four, they “skip” the September due date, but make the other payments larger. Utah however doesn’t have an estimated payment requirement and expects your entire liability to be paid each April.

The following states do not have income tax and therefore, do not have estimated tax payments: 

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

For more information about making estimated tax payments for your state, CLICK HERE.