Whether you’ve been paying estimated taxes for years or you’re entirely new to the idea, now is a great time to review the details. Let’s start with some basics:
- Your estimated taxes are paid using form 1040-ES. The form has four stubs because there are four payments to make every year.
- If you are an employee, you make less than $100,000 per year, and you don’t own a business, then it’s very likely that you won’t have to pay estimated taxes.
- If you are an employee who earns RSUs, check out our post.
- If you own a business, and if it’s made income this year, then you more than likely will be expected to pay estimated taxes.
- If you are an independent contractor (i.e. a freelancer), this technically also means you own a business — the business of you providing goods or services to external parties. The question of whether you need to pay estimated taxes might not be that simple. It all depends on the income you made during the previous year, as well as your deductions and other elements of your personal tax situation.
- If none of the above situations apply to you, or if you have specific questions, then don’t hesitate to contact your tax professional!
When in doubt, you can always just pay estimated taxes anyway if you have the funds to do so during the year. If you find that you’re always coming up short when estimated taxes are due, there are some time-tested strategies for organizing your finances and saving up for taxes.
Naturally, the next question to tackle is: When are estimated taxes due? Knowing the due dates ahead of time can help you plan your tax savings account or sub-account. If you don’t have a place to put your tax savings, we recommend you set one up! Establishing a business sub-savings account is generally simple and easy to do.
Generally speaking, taxes are due on the 15th day of the month in which they are due. This shifts around a bit depending on how the weekends fall during the year, and the IRS can always opt to push back the due date at its discretion. Here’s the official word from the IRS:
If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that’s not a Saturday, Sunday, or legal holiday.
In order to avoid a last-minute scramble in 2023, here are the due dates:
- Your 1040 and first (Q1) payment for 2023 estimated taxes is April 18, 2023.
- The second (Q2) payment is due on June 15, 2023.
- Your Q3 estimated tax payment is due September 15, 2023.
- Your Q4 payment is due January 15, 2023.
Due to recent disasters, eligible taxpayers in California, Alabama and Georgia, for example, have until Oct. 16, 2023, to make 2023 estimated tax payments, normally due on April 18, June 15 and Sept. 15. People in other states may have extended deadlines as well; a full list is available on the Tax Relief in Disaster Situations.
Estimating the Amount Due
Now that we’ve covered the due dates, how do you figure out the amount to send to the IRS?
Every time we talk about estimates, it’s worth bringing up what are called the “safe harbor” rules. If you pay these amounts, the IRS has agreed not to penalize you for late payments or underpayments:
- The “safer” safe harbor rule: If your 1040-ES payments plus all withholdings add up to at least 100% of your prior year’s tax due, then you will not owe late payment penalties. [Special note: This changes to 110% of the prior year’s tax due if your AGI is $150,000 or more.]
- The “bit of a gamble” safe harbor rule: If your 1040-ES payments plus all withholdings add up to 90% or more of the amount you will ultimately owe in taxes, then you will not owe late payment penalties. Because no one can see the future, this requires careful estimates.
TIP: Set aside 30% of your net income each month into a savings account. Then use this amount to pay your estimated taxes when they are due.
If you’re wondering how exactly you’re supposed to estimate the taxes you will have to pay next year, we can sum up the process here. Since your first 1040-ES payment is due April 15th, that means you can base this first payment on your annualized Q1 (Jan – Apr) earnings. The simplest way to do this would be to multiply your Q1 earnings by four. If your business is seasonal (if sales fluctuate based on seasons, holidays, or the weather) then this calculation will be a bit more involved.
While the second payment is known as the Q2 payment, it’s due a scant 2 months after the first payment! Just do your best and annualize your January – May income. Hopefully you have a habit of reconciling and cleaning up your books every month, because this payment will be due before a quarterly reconciler finishes the Q2 books.
The Q3 September 15th payment, again, is due before the calendar Q3 closes. By this time your business has finished 8 months of operation, so you could make a quick estimate by multiplying your January through August earnings by 1.5.
As for Q4, the payment is due right after the end of the year on January 15th. Your accounting team (or you) may have to scramble a bit to close the previous year and get estimates ready in time. Just do your best, and consider paying a little extra if you can afford it. You can get any overpayments refunded when you file your taxes.
Where to Pay Estimated Taxes Online
If it’s the 15th already and mail has been picked up, or if you just want the convenience, you can pay your 1040-ES payments online at irs.gov/payments. Direct Pay is not to be confused with the Electronic Federal Tax Payment System (EFTPS), which is used for business tax payments.
The Direct Pay system closes every night at 11:45pm Eastern Time, so Washingtonians take heed: Payments will be late if you try to make them after 8:45pm PST on the due date! The system is also down for the first 7 hours (ET) of every Sunday, but this isn’t relevant because the due date would be pushed to the following Monday.
To make a payment, click the payment method, and for “Reason for Payment” select “Estimated Tax” and make sure to have your tax records and bank information ready to fill in the remaining information. Don’t forget to submit your payment before closing the window!
You have a different option from Direct Pay if you’d like to pay via credit or debit card. There is a small flat fee for debit card payments, but the fee for credit card payments is a percentage, so we recommend against credit card payments unless your tax due is very low.
TL;DR: If you’re a business owner or freelancer, you likely need to pay estimated taxes using Form 1040-ES. Pay special attention to the due dates because they’re funky — they don’t line up with calendar quarters! You can pay your taxes online using Direct Pay on the IRS website. As for the amount to pay, make sure to use the safe harbor rules to avoid penalties. When in doubt contact your tax professional. If you’d like us to be your tax professionals, give us a call!