Do I Have To Pay Estimated Taxes?
Understanding Estimated Tax Payments
The U.S. operates on a “pay as you go” tax system. This requires you to pay taxes throughout the year. You can do this through payroll withholding, by making estimated tax payments or both.
Not paying the IRS enough taxes during the year triggers an estimated tax penalty.
The IRS charges this non-deductible interest penalty on the amount you underpaid each quarter. The penalty rate equals the short-term interest rate plus three percentage points.
Currently, the estimated tax penalty rate stands at 8 percent, the highest in 17 years. This rate is especially costly because it is not deductible.
For 2024, the quarterly estimated tax payment deadlines are:
April 15, 2024
June 17, 2024
September 16, 2024
January 15, 2025
Who Has to Make Estimated Tax Payments
If you’re an employee and have all the tax you owe withheld by your employer you most likely don’t have to worry about this penalty.
If you own a business or have untaxed income, like dividends or rent, you do have to worry about this penalty. You are responsible for paying taxes on the profits of your business and any other income with no tax withholding.
C corporations also have to worry about this penalty.
Luckily, avoiding this penalty is straightforward. Individuals need to pay either 90 percent of the tax due for the current year or 100 percent of the tax from the previous year. For higher-income earners, this threshold rises to 110 percent. Corporations should pay 100 percent of the tax shown on their return for the current or previous year.
Payments should be evenly spread over four quarterly estimated tax payments. Remember, you cannot offset a penalty in one period by increasing a payment in another. This holds true even if you overpay and are due a refund when you file your tax return.
A CPAs role in Managing Estimated Taxes
While the rules for avoiding the estimated tax penalty are straightforward, calculating the amount to pay is not. A CPA is crucial to compiling the financial pieces to pay the correct estimated taxes. The financial pieces for a business owner include the business’s taxable income, a spouse’s income, investments, rentals and any tax deductions. After looking at all this information, a CPA can look for any tax savings and then calculate the correct estimated tax that needs to be paid.