Don't Mess With Taxes

NOTE, Sept. 18, 2024: This estimated tax deadline is extended for taxpayers in officially designated major disaster areas. To date, such extensions apply to today's tax due date (and more) in 20 states and two U.S. territories. 

Millions of taxpayers will be sending Uncle Sam some more money next week.

Monday, Sept. 16, is the due date for their third 2024 tax year estimated tax payment.

At least we — yes, I’m a long-time payer of estimated taxes — have an extra day to fulfill this tax obligation, since the regular Sept. 15 deadline is on Sunday.

But we all need to be thinking about this upcoming payment now.

Why pay estimated tax? There are two answers to this question.

First, the reason for the process itself. U.S. tax laws says we must pay tax on our income as it is earned or received during the year. For folks with wage-paying jobs, that’s done via payroll withholding.

But when we get other earnings that aren’t subject to withholding, the Internal Revenue Service wants us to pay the due tax via estimated tax payments. This covers folks who are self-employed, either full-time or have assorted gig jobs; retirees receiving federal or private pension benefits; winners of wagers where the payer doesn’t automatically withhold a portion; and that other kind of gambling, investment earnings.

The general rule of thumb is that these individual should make estimated tax payments if they expect:

1. To owe at least $1,000 in taxes for 2024 after subtracting their withholding and tax credits.
2. Their withholding and tax credits to be less than the smaller of:
• 90% of the tax to be shown on their 2024 tax return or
• 100% of the tax shown on their complete 12-month 2023 tax return. 

In these cases, the IRS prefers you determine as accurately as possible what you’ll owe in estimated taxes for the full year and pay it in four equal installments on the dates in the following table.
    

   
Although the payments are referred to as quarterly estimated taxes, that simply means four of them, not along the quarters associate with a calendar year. Note, too, the asterisk that applies to the coming third payment due Sept. 16.

A good place to start in figuring your estimated tax is your prior year’s tax return. If your financial and tax situation hasn’t changed that much, that earlier Form 1040’s income, deductions, and credits are a good starting point for your current estimated tax math.

IRS.gov also has several tools to help you check on your potential estimated tax situation. They include the agency’s online Tax Withholding Estimator and IRS Interactive Tax Assistant, as well as the worksheet in Form 1040-ES, Estimated Tax for Individuals.

No one like to do more tax work than necessary, but these calculations are part of the second answer as to why you should pay estimated taxes. If you don’t, you’ll likely end up paying more.

Penalty for underpayment: If you underpay your tax liability, you may have to pay a penalty regardless of whether you paid through withholding or through estimated tax payments.

Late and skipped estimated tax payments can incur penalties even if a refund is due when a tax return is filed.

If you do skip an estimated tax payment, you’ll also have to do additional tax filing work to determine just how much of a penalty you owe. That’s done by completing Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts. You can, however, request a waiver of the penalty if you underpaid because of unusual circumstances, and not because of willful neglect.

Special rules also apply to some groups of taxpayers, including farmers, fishermen, those who recently became disabled, recent retirees, casualty and disaster victims, and those who receive income unevenly during the year.

Payment your estimated taxes options: As with most payments, the IRS encourages all us payers of estimated amounts to make them electronically.

E-paying, says the IRS, generally is the easiest, fastest, and most secure way to make an estimated tax payment. You can check out my earlier post on ways to pay estimated taxes. They include credit or debit card, Direct Pay, paying through your online IRS account, and the agency’s oldest option (which I still use) Electronic Federal Tax Payment System, or EFTPS.

If you’re ready to use one of those options, the IRS’ online payments page will help you complete the tax transaction.

All y’all mostly mobile taxpayers can download the IRS’ app IRS2Go and use it to pay your estimated tax payment.

Or, if you prefer, you can use the U.S. Postal Service to mail the IRS your payment via check or money order. Make the paper financial document payable to the United States Treasury, include the paper payment voucher (shown below) in the envelope, and drop it off at your local post office.

IRS Form 1040-ES, estimated tax voucher 3. See more tax forms and more about them at Tax Forms 2024.

   
Pay on time: Regardless of whether you handle your estimated taxes electronically or are an old-school paper filer, don’t miss the deadline. in time for it to be postmarked Sept. 16.

I like to schedule all my e-payments when I make the year’s first one in April. That way, I don’t have to worry about something coming up on the due date and distracting me, or my internet provider deciding that’s the day it will be wonky. My payment is already in the system. All I have to do is make sure I have enough money in my account.

As for check or money order estimated taxpayers, get your properly addressed envelope — check page 5 of the 1040-ES packet for the correct mailing address based on where you live — to the post office in time for it to get the deadline postmark. That’s how the IRS determines that your payment was made on time.

This attention to timing is critical. Paying even a day late could prompt the penalty discussed earlier in this post. And none of us wants to pay the IRS even a penny more than we legally must.

You also might find these items of interest:

• A quick estimated tax Q&A
• Estimated taxes: Why, when, and how to pay them
• Safe harbors and other ways to avoid estimated tax penalties

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