Should You Be Paying Estimated Taxes?

Find out more about estimated taxes, who pays them, and steps necessary to be compliant.

Estimated taxes are paid throughout the tax year by partners, individual contractors, and self-employed individuals if they expect to owe taxes on their business and investment income at the end of the year. While those who pay taxes through their employer’s payroll withholdings typically take care of any remaining taxes due at the end of the year, self-employed workers must pay estimated taxes if they expect to owe money at the end of the year on their personal tax return. In addition to estimated taxes needing to be paid timely during the year, the tax liability reported on your tax return must be paid by the tax deadline in order to avoid late payment penalties. 

What are estimated taxes?

Income earners who do not have tax withheld throughout the year from their wages or salary are responsible for estimating their tax liability and paying on a quarterly basis the expected year-end tax amount.  Partners, self-employed individuals, and contract workers who decide to make quarterly estimated tax payments should make sure they know the due dates for these quarterly payments and understand how to adequately estimate the amount of tax due.

It’s important to note that the option to pay in full at the tax deadline (generally April 15) as a self-employed worker to avoid any underpayment penalty is only available to individuals who:

●  had no tax liability for the prior year that covered a 12-month period; and

●  were a US citizen or resident for the whole year.

Ready for the math? The IRS Estimated Tax Worksheet can help you estimate your tax liability for the year. Don’t forget to consider your allowable deductions and credits because they will have an impact on your final estimated tax liability.

In general, in lieu of paying estimated taxes based on your anticipated current year tax liability, estimated taxes can be based on 100% of your prior year’s tax liability (110% of your prior year’s tax liability if your adjusted gross income was greater than $150,000 last year), or if to your advantage, on current year activity that precedes the quarterly due date which is then annualized (i.e., the annualization method).

When are estimated taxes due?

The tax year is divided into four quarterly tax payment dates spread throughout the year.  The due dates for the calendar year 2022 estimated tax payments are:

●  April 18, 2022;

●  June 15, 2022;

●  September 15, 2022; and

●  January 17, 2023.

How do you pay quarterly estimated taxes?

For a fee, you can always make your quarterly estimated tax payments with a debit or credit card, but IRS Direct Pay offers a direct transfer of funds from your bank account to the IRS for free. Payment can also be made by check that is mailed to the IRS with a completed estimated tax payment voucher, Form 1040-ES.  Regardless of how you make payment, you’ll want to maintain records of your payments (e.g., confirmation number for IRS Direct Pay, bank or credit card statement for payment by debit or credit card) that show the amount and date paid to help you prepare your tax return.

Penalties and special rules

If your 2022 tax liability is $1,000 or more, and you fail to make quarterly tax payments or make them after the required quarterly due dates, you may be charged a penalty.  This penalty is an interest charge based on the number of days a payment is late, so if you miss a quarterly payment date, a prompt corrective payment can minimize the resulting penalty.

There are special estimated tax rules for farmers and fishermen. If at least two-thirds of their gross income for 2022 or 2021 is from farming or fishing, they can determine their estimated tax amount based on two-thirds of their prior year’s tax liability or 100% of their current year liability, regardless of their income level.  And instead of quarterly payments, only one payment is required that must be paid by January 15, 2023.

We’re here to help

Decimal takes the guesswork out of quarterly estimated tax payments for self-employed contractors. Our dedicated team of accountants and specifically configured software will assist you in determining that your quarterly payments are estimated correctly, take into account your credits and deductions to calculate the payment amount, and set up payment dates to assist you in making payments timely. Contact Decimal today to see how we can improve your accounting operations and restore time in your day! 

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