Heading back to the office is always challenging after the holidays. But as you get back to work—and get busy—don’t forget to make your fourth-quarter estimated tax payments. They are due on or before January 17, 2023.
Who Needs To Make Estimated Payments?
Generally, you should make estimated tax payments if you are not subject to withholding—this includes taxpayers who rely on income reported on Form 1099 (like self-employment income, interest, dividends, and retirement income). If you’re self-employed, a gig economy worker, a retiree with a pension or other income, or a partner in a partnership or LLC, this likely applies to you.
Even if you are subject to withholding—but you are not withholding enough—you may need to make estimated payments. This includes taxpayers who have two wage-earner households or complicated tax situations.
Confused? Here’s the math. For the 2022 tax year, you will need to make estimated payments if you:
- You expect to owe at least $1,000 in tax for the 2022 tax year after subtracting your withholding and credits.
- You expect your withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2022 tax return or 100% of the tax shown on your 2021 tax return.
For most taxpayers, a good rule of thumb is to make sure that you pay as much as you owed last year (see #2 above). You figure your quarterly payments by dividing that number by four. So if the tax shown on your 2021 tax return was $10,000, you want to be sure to have paid in $10,000 over the course of 2022—that works out to $2,500 per quarter.
Who Might Get A Break?
Special rules apply to some groups of taxpayers, like farmers, fishermen, and victims of natural disasters, those who recently became disabled, recent retirees, and those who receive income unevenly during the year. You can find out more in Publication 505, Tax Withholding and Estimated Tax.
How Can You Make a Payment?
To figure the amount of your estimated tax, you can use form Form 1040-ES, Estimated Tax for Individuals. Then, you have a few options:
- You can write a check to mail to the IRS (yes, people still write checks).
- You can pay electronically by scheduling tax payments up to 30 days in advance with Direct Pay or up to 365 days in advance with the Electronic Federal Tax Payment System (EFTPS).
- You can also pay immediately through your IRS Online Account. You can make a guest payment without logging in.
The IRS does not charge a fee for these services.
What Happens If You Don’t Make Your Payment On Time?
Don’t be too casual about your payments. If you do not pay enough tax by the due date for each quarter, you may be charged a penalty even if you are due a refund when you file your income tax return.
The IRS will determine the penalty for most taxpayers and send a bill.
If you are subject to a penalty and believe you might be eligible for some relief, you can turn to Form 2210. Form 2210 comes in handy, for example, if your income is uneven throughout the year—particularly true for those who rely on seasonal employment. When this happens, your estimated tax payment is calculated at the end of each period based on a reasonable estimate of your income, deductions, and other items from the beginning of the tax year through the end of the period. While this method can save you from unwanted penalties, it can also be tricky. Be sure to consult with your tax pro if you have questions.
What If You Screw Up?
If you miss a payment, there’s no need to panic. Just pay when you can. The penalty is worth, roughly, the unpaid interest on the estimated payment.
But don’t push it off. I’ve noted before that most of the taxpayers who end up in my office with Form 1099-related issues thought they would be able to kick the can down the road, hoping for better days. That rarely works out in your favor. Even if you can’t pay your balance in full, making an effort to pay something is a good idea.
