Why are estimated tax payments required and who must pay them? When are they due? What are the penalties for late payments or if you underpay? What options do you have to pay to avoid penalties? These are the questions we are going to answer in today’s blog, as the fourth quarter estimated tax payment deadline is quickly approaching. If you have significant and/or complex non-W-2 income, you need to read this blog post.
The U.S. income tax system utilizes a “pay-as-you-go” approach, so the federal government collects its share throughout the year, as you earn your income. The logic behind this approach is that as you earn the income, you should also have the cash to pay the related tax. If the federal government waited until April 15th of the following year to collect the full amount of tax, taxpayers may have already spent that cash and wouldn’t have the money to pay the taxes due. For W-2 earners, the IRS gets its share through tax withholding each time the employee receives a paycheck. For taxpayers that have other sources of income, where taxes aren’t withheld, it’s their responsibility to pay the IRS each quarter, by making estimated tax payments.
Currently, the due dates for quarterly estimated payments are as follows:
|Quarter||Dates Income is Earned||Estimated Payment Due Date|
|1st Quarter||January 1st through March 31st||April 15th|
|2nd Quarter||April 1st through May 31st||June 15th|
|3rd Quarter||June 1st through August 31st||September 15th|
|4th Quarter||September 1st through December 31st||January 15th|
If the due date falls on the weekend or on a holiday, it is moved to the next business day. This is the case with Q4-2021 payments. January 15, 2022, fell on a Saturday, and the following Monday (today) is Rev. Dr. Martin Luther King Jr. Day, a national holiday. So, tomorrow, January 18th, which is the next business day, is the due date. Penalties apply if estimated tax payments are not paid timely or if they are lower than the required amounts. For more detailed information regarding penalties, please refer to our previous blog.
There are different approaches on how to calculate estimated tax payments. The method you use will be dependent on your unique circumstances, but we will provide you with some factors to consider in facilitating your decision, or at least help start the discussion with your tax advisor.
Whichever approach you choose, the IRS has several payment options available (credit card, debit card, check, etc.) for taxpayers to make their estimated tax payments. Visit the IRS website for more information on the various payment methods offered by the IRS.
Keep in mind that the above information relates to federal estimated tax payments. Please review your state and city income tax obligations, as they may require estimated payments, as well.
If you have significant income that does not come from an employer (W-2) and would like more insight on your personal situation, please call on us for a consultation. The Tax Warriors® at Drucker & Scaccetti are experts in helping you manage your taxes from multiple, complex income sources.