If you’re an employee, your employer takes tax out of every paycheck and sends it to the IRS for you. If you have income nobody withholds tax from, the IRS still expects the tax during the year, not all at once in April. Estimated payments are how you send it.
Who has to make them
You generally need to make federal estimated payments if you expect to owe at least $1,000 in tax for the year after subtracting your withholding and credits. That usually means people with:
- self-employment or freelance income
- a side business alongside a job
- rental income
- large amounts of interest, dividends or capital gains
- S-corp distributions or partnership income, if the salary withholding doesn’t cover the tax
When they’re due
The year is split into four payment periods. The payments fall in April, June and September of the tax year, and in January of the following year. When a date lands on a weekend or a legal holiday, it moves to the next business day. Our tax calendar lists the exact dates for the coming year.
Virginia has its own estimated payments, made with Form 760ES, on its own schedule. If you owe Virginia tax that isn’t withheld, you’ll usually need both.
How much to pay
The underpayment penalty is the reason to get this right. You can generally avoid it if your withholding and estimated payments together come to at least 90% of this year’s tax, or 100% of last year’s. If your adjusted gross income last year was over $150,000, the second figure rises to 110%.
Basing the payments on last year’s tax is the simpler route, and it protects you from the penalty even if this year turns out much better. The catch is that a good year still ends with a larger balance due in April, so set some money aside as the year goes.
How we work it out
For clients, we set the four payments from last year’s return and what we know about this year, and we adjust them mid-year if the business is running well ahead of or behind last year. Our self-employment tax calculator gives you a rough figure for a quarter, and we can give you the exact amounts.
Payments can be made online through IRS Direct Pay or the Virginia Tax website. Keep the confirmation numbers; we’ll ask for them when we prepare your return.