Once upon a time, the U.S. Treasury did not require estimated tax payments from individuals. They quickly realized that they had a tremendous cash flow problem: they were only getting paid once a year, but their bills were all year. They then implemented the estimated tax payment system and payroll withholding to “pre-pay” the tax bill. Being a business owner, you don’t need to “withhold” income taxes like you did when you were a W2 employee. Instead, quarterly estimated tax payments are your vector for doing that.

Once upon a time, the U.S. Treasury did not require estimated tax payments from individuals. They quickly realized that they had a tremendous cash flow problem: they were only getting paid once a year, but their bills were all year. They then implemented the estimated tax payment system and payroll withholding to “pre-pay” the tax bill. Being a business owner, you don’t need to “withhold” income taxes like you did when you were a W2 employee. Instead, quarterly estimated tax payments are your vector for doing that.

To get to your question of if estimated tax payments apply to you, it is important to understand how they work. If you expect to owe more than $1,000 in taxes for the year, after any applicable W2 withholding is applied, you will be required to make estimated tax payments. If you aren’t sure if you will hit that $1,000 tax due mark, look at last year’s return. If you owed more than $1,000 after any W2 withholding, the IRS will be expecting you to make estimated tax payments. If estimated tax payments are required, and they aren’t made, the IRS will charge a penalty.

“Okay, how do I calculate the amount of each payment?”

  • If your prior year Adjusted Gross Income (AGI, line 37 on your 1040) was $150,000 or less, then you can pay either 90 percent of this year’s income tax liability, or 100 percent of your income tax liability from last year (dividing what your tax bill was last year into four equal payments).
  • If your prior year’s AGI was greater than $150,000, then you must pay either 90 percent of this year’s income tax liability, or 110 percent of last year’s income tax liability. Whichever method you choose, it must be made in four equal quarterly payments.

It is important to track what you have paid in estimated tax payments. Be sure to note the date you sent in each payment, the amount, and check number. Sometimes the IRS will cash your estimated tax payment and accidentally charge it to the wrong account, and will ask for this proof to confirm it was from you. It doesn’t happen often, but we have seen it more than once.

“When are the estimated tax payments due?”

The 1st quarterly payment is due April 15th

The 2nd quarterly payment is due June 15th

The 3rd quarterly payment is due September 15th

The 4th quarterly payment is due January 15th of the following year.

If you have a tax refund coming from the IRS, you can elect on your return to have part or all of the money applied to your estimated tax bill for the current year. Although the IRS doesn’t pay interest on such advance payments, it may make sense to use the refund to pay the first installment (due April 15th) and perhaps even the second installment (due June 15th) just to save yourself the hassle of writing and sending in the checks.

Send in all quarterly tax payments with an Estimated Tax Payment Voucher. These vouchers are usually provided by your tax preparer (including Halon!) with your information pre-printed on them. The vouchers can also be found at the IRS website here: https://www.irs.gov/pub/irs-pdf/f1040es.pdf

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