Understanding Estimated Taxes: What They Are and Why They Matter

If you’ve ever owed money when filing your income tax return, you’ve likely heard the terms “estimated taxes” or “estimated tax payments.” But what exactly are they? What’s their purpose? How are these payments calculated? And when are they due? We’ll answer these questions and more below.

Here’s a quick fact: if you anticipate owing $1,000 or more on your federal income tax return for 2024, you should be making estimated tax payments to the IRS.

What Are Estimated Tax Payments?

Estimated tax payments are periodic payments made throughout the year to cover your tax liability if you expect to owe $1,000 or more in federal income taxes. These payments are typically due on April 15, July 15, September 15, and January 15. Many states also have their own estimated tax payment requirements.

How Are Estimated Tax Payments Calculated?

To calculate your estimated tax payments, start by determining your anticipated tax liability for the current year.

• If you’ve never owed taxes before, aim to pay at least 90% of your projected tax bill for the year in quarterly installments.

• If you’ve owed taxes in the past, you should pay 100% of your previous year’s tax bill at a minimum to avoid penalties.

How Are These Payments Made?

Estimated tax payment vouchers are typically issued for each quarter. Both federal and state agencies may provide these vouchers, depending on your situation. Payments can be mailed with a check or cashier’s check or made online through the respective agency’s website using a credit card, debit card, or electronic funds transfer (EFT).

Do I Have to Make Estimated Tax Payments?

If you’ve owed taxes in the past or anticipate owing taxes, it’s strongly recommended to make estimated tax payments.

• What happens if I don’t pay? If you fail to make the required payments, you’ll likely face a larger tax bill when filing your return, along with an underpayment penalty.

• What if I only pay part of the amount? Partial payments reduce your overall liability but may still leave you with an underpayment penalty if you don’t meet the required percentage.

Why Are These Payments Important?

Making estimated tax payments helps you avoid financial surprises at tax time. They also reduce the risk of underpayment penalties, which apply if you don’t meet the minimum thresholds for federal and state tax obligations.

Final Thoughts

If you believe you’ll owe taxes or have owed in the past, it’s important to make estimated tax payments to the IRS and any applicable state agency. These payments reduce your year-end liability and help you avoid penalties.

If you have questions about estimated tax payments, our team is here to help. We can guide you through the process, answer your questions, and provide strategies to simplify your tax planning.