If you are self-employed or receive income other than a salary or employment wages, you could be responsible for making estimated tax payments.
You might think of these estimated taxes as an advance payment against your expected tax liability for a given year. The IRS requires certain people and businesses to make quarterly estimated tax payments (that is, four times each year).
Not sure if you are required to make estimated tax payments or how much you should pay? Here’s a closer look at this topic, which will cover:
• What are estimated tax payments?
• Who needs to make estimated tax payments?
• What are the pros and cons of estimated tax payments?
• How do you know how much you owe in estimated taxes?
What Are Estimated Tax Payments?
Estimated tax payments are payments you make to the IRS on income that is not subject to federal withholding. Ordinarily, your employer withholds taxes from your paychecks. Under this system, you pay taxes as you go, and you might get money back (or owe) when you file your tax return, based on how much you paid throughout the year.
So what is an estimated tax payment designed to do? Estimated tax payments are meant to help you keep pace with what you owe so that you don’t end up with a huge tax bill when you file your return. They’re essentially an estimate of how much you might pay in taxes if you were subject to regular withholding, say, by an employer.
Estimated tax payments can apply to different types of income, including:
• Self-employment income
• Income from freelancing or gig work (aka a side hustle)
• Interest and dividends
• Rental income
• Unemployment compensation
• Alimony
• Capital gains
• Prizes and awards
If you receive any of those types of income during the year, it’s important to know when you might be on the hook for estimated taxes. That way, you can avoid being caught off-guard during tax season.
💡 Quick Tip: Tired of paying pointless bank fees? When you open a bank account online you often avoid excess charges.
Get up to $300 when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 4.20% APY on savings balances.
Up to 2-day-early paycheck.
Up to $2M of additional FDIC insurance.
How Do Estimated Tax Payments Work?
Estimated tax payments allow the IRS to collect income tax, as well as self-employment taxes from individuals who are required to make these payments. When you pay estimated taxes, you’re making an educated guess about how much money you’ll owe in taxes for the year.
The IRS keeps track of estimated tax payments as you make them. You’ll also report those payments on your income tax return when you file. The amount you paid in is then used to determine whether you need to pay any additional tax owed, based on your filing status and income, and the deductions or credits you might be eligible for.
Failing to pay estimated taxes on time can trigger tax penalties. You might also pay a penalty for underpaying if the IRS determines that you should have paid a different amount.
Who Needs to Pay Estimated Tax Payments?
Now that you know what an estimated tax payment is, take a closer look at who needs to make them. The IRS establishes some rules about who is liable for estimated tax payments. Generally, you’ll need to pay estimated taxes if:
• You expect to owe $1,000 or more in taxes when you file your income tax return, after subtracting any withholding you’ve already paid and any refundable credits you’re eligible for.
• You expect your withholding and refundable credits to be less than the smaller of either 90% of the tax to be shown on your current year tax return or 100% of the tax shown on your prior year return.
• The tax threshold drops to $500 for corporations.
Examples of individuals and business entities that may be subject to estimated tax payments include:
• Freelancers
• Sole proprietors
• Business partners
• S-corporations
• Investors
• Property owners who collect rental income
• Ex-spouses who receive alimony payments
• Contest or sweepstakes winners
Now, who doesn’t have to make estimated tax payments? You may be able to avoid estimated tax payments if your employer is withholding taxes from your pay regularly and you don’t have significant other forms of income (such as a side hustle). The amount the employer withholds is determined by the elections you make on your Form W-4, which you should have filled out when you were hired.
You can also avoid estimated taxes for the current tax year if all three are true:
• You had no tax liability for the previous tax year
• You were a U.S. citizen or resident alien for the entire year
• Your prior tax year spanned a 12-month period
Pros and Cons of Estimated Taxes
Paying taxes can be challenging, and some people may dread preparing for tax season each year. Like anything else, there are some advantages and disadvantages associated with estimated tax payments.
Here are the pros:
• Making estimated tax payments allows you to spread your tax liability out over the year, versus trying to pay it all at once when you file.
• Overpaying estimated taxes could result in a larger refund when you file your return, which could be put to good use (such as paying down debt).
• Estimated tax payments can help you create a realistic budget if you’re setting aside money for taxes on a regular basis.
And now, the cons:
• Underpaying estimated taxes could result in penalties when you file.
• Calculating estimated tax payments and scheduling those payments can be time-consuming.
• Miscalculating estimated tax payments could result in owing more money to the IRS.
Recommended: What Happens If I Miss the Tax Filing Deadline?
Figuring Out How Much Estimated Taxes You Owe
There are a few things you’ll need to know to calculate how much to pay for estimated taxes. Specifically, you’ll need to know your:
• Expected adjusted gross income (AGI)
• Taxable income
• Taxes
• Deductions
• Credits
You can use IRS Form 1040 ES to figure your estimated tax. There are also online tax calculators that can do the math for you.
• If you’re calculating estimated tax payments for the first time, it may be helpful to use your prior year’s tax return as a guide. That can give you an idea of what you typically pay in taxes, based on your income, assuming it’s the same year to year.
• When calculating estimated tax payments, it’s always better to pay more than less. If you overpay, the IRS can give the difference back to you as a tax refund when you file your return.
• If you underpay, on the other hand, you might end up having to fork over more money in taxes and penalties.
Paying Your Estimated Taxes
As mentioned, you’ll need to make estimated tax payments four times each year. The due dates are quarterly but they’re not spaced apart in equal increments.
Here’s how the estimated tax payment calendar works for 2024:
| Payment | Due Date |
|---|---|
| First Payment | April 15, 2024 |
| Second Payment | June 17, 2024 |
| Third Payment | September 16, 2024 |
| Fourth Payment | January 15, 2025 |
Here’s how to pay:
• You’ll make estimated tax payments directly to the IRS. You can do that online through your IRS account, through the IRS2Go app, or using IRS Direct Pay.
• You can use a credit card, debit card, or bank account to pay. Note that you might be charged a processing fee to make payments with a credit or debit card.
• Certain IRS retail locations can also accept cash payments in person.
Keep in mind that if you live in a state that collects income tax, you’ll also need to make estimated tax payments to your state tax agency. State (and any local) quarterly estimated taxes follow the same calendar as federal tax payments. You can check with your state tax agency to determine if estimated tax is required and how to make those payments.
The Takeaway
If you freelance, run a business, or earn interest, dividends, or rental income from investments, you might have to make estimated tax payments. Doing so will help you avoid owing a large payment on Tax Day and possibly incurring penalties. The good news is that once you get into the habit of calculating those payments, tax planning becomes less stressful.
Another way to make your financial life less stressful: Find the right banking partner.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
What happens if I don’t pay estimated taxes?
Failing to pay estimated taxes when you owe them can result in tax penalties. Interest can also accrue on the amount that was due. You can’t eliminate those penalties or interest by overpaying at the next quarterly due date or making one large payment to the IRS at the end of the year. You can appeal the penalty, but you’ll still be responsible for paying any estimated tax due.
What if you haven’t paid enough in estimated tax payments?
Underpaying estimated taxes can result in a tax penalty. The IRS calculates the penalty based on the amount of the underpayment, the period when the underpayment was due and not paid, and the applicable interest rate. You’d have to pay the penalty, along with any additional tax owed, when you file your annual income tax return.
How often do you pay estimated taxes?
The IRS collects estimated taxes quarterly, with the first payment for the current tax year due in April. The remaining payments are due in June, September, and the following January. You could, however, choose to make payments in smaller increments throughout the year as long as you do so by the quarterly deadline.
Photo credit: iStock/pixdeluxe
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit activity can earn 4.20% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.20% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/31/2024. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SOBK0224006