If you have income from self-employment, gig economy work, investments or retirement plan withdrawals, you need to know about another tax deadline on April 18, 2023: the due date for first quarter estimated tax payments.
If you work and don’t have income taxes automatically withheld from your pay, you may need to pay quarterly taxes — or you could end up with a penalty. Keep reading to find out everything you need to know about paying quarterly taxes.
Who Has to Pay Quarterly Taxes by the April 18 Deadline?
Employees generally have income taxes withheld from their paychecks, so they don’t need to worry about paying quarterly taxes. And if you have too much withheld during the year, you may get a refund when you file your return.
But many income sources don’t automatically withhold taxes for you.
“Self-employment income, interest, dividends, capital gains, unemployment and Social Security are all sources of income that generally don’t have withholding,” Melody Thornton, certified public accountant and tax manager at Fitzgerald & Company in San Diego, says.
If you don’t pay taxes on this income throughout the year, you could end up with a big bill when you file your return. And you could end up with an underpayment penalty — even if you pay the amount due in full by the annual filing deadline.
When Quarterly Taxes Are Due
Quarterly taxes for income you earned from Jan. 1 through March 31 are usually due on April 15 (April 18 in 2023 because the April 15 falls on a Sunday and Washington’s Emancipation Day falls on Monday, April 17).
Second quarter taxes for income you earned from April 1 through May 31 are due June 15; third quarter for income earned from June 1 to Aug. 31 are due Sept 15; and fourth quarter for income earned Sept. 1 through Dec. 31 are usually due on Jan. 15 of the following year (that date will be Jan. 16 in 2024 because Martin Luther King Day falls on Monday, Jan. 15).
“The IRS expects that anyone who will owe $1,000 on their tax return because previous tax payments and withholding were insufficient should make estimated tax payments,” Mary Kay Foss, CPA in Walnut Creek, California, says.
“Most taxpayers become very upset at the idea of paying a penalty in connection with their taxes but the penalty is actually interest — and the interest rate is usually much less than they would pay on any other form of borrowing,” she adds.
[READ:How to File Taxes When You Are Self-Employed]
How Much Do You Have to Pay By the April 18 Deadline?
You can usually avoid the underpayment penalty if you owe less than $1,000 in tax after subtracting your withholding and refundable credits. You can also avoid it if you paid at least 90% of the taxes you owe for the current year or 100% of the taxes you owed for the prior year — or 110% of those taxes if your adjusted gross income was $150,000 or more (whichever amount is less) through withholding and estimated taxes.
You can use the worksheet in the instructions for IRS Form 1040-ES to estimate how much you need pay in quarterly taxes. Because of the way the IRS calculated penalties, these estimated tax payments should be close — but they don’t need to be precise.
“If income is going up from year to year, then using the prior year safe harbor is the easiest way to determine the estimates required,” Thornton says. “However, in years when paying 90% of the current tax year is less, then estimates can be calculated each quarter.”
If you have income from self-employment, keep in mind that your tax liability also includes self-employment tax.
“People who are self-employed not only pay tax on the net profit from their businesses, they also pay self-employment tax,” Foss says.
“This is a Social Security and Medicare tax — the self-employed person is both the employer and the employee, so the rate they pay is twice what is withheld from someone working for someone else. Without a withholding source, self-employed people will need to make estimated tax payments,” she says.
You can’t avoid a penalty just by making extra payments at the end of the year. If you don’t pay enough each quarter, you may be charged a penalty even if you’re due a refund when you file your annual income tax return.
“The underpayment of estimates penalty is calculated like interest and the amount charged is computed on the underpaid tax at the interest rate set by the IRS for that period,” Thornton says. “The IRS changes interest rates as market interest rates go up and down.”
For more information, see IRS Publication 505 Tax Withholding and Estimated Tax.
How to Pay Quarterly Taxes by April 18
After you calculate the amount you owe, you can fill out an estimated tax payment voucher in the IRS 2023 Form 1040-ES publication and mail it with a check to the address listed for your state. You can also make your quarterly payments online — see the IRS Make a Payment page for options. Note that this is a different address from the one to which you send your federal return.
You also must find out whether you need to pay quarterly income taxes to your state, so check with your state department of revenue.
“Most states with an income tax expect taxes to be prepaid in a similar way to the federal rules,” Foss says. “States will also assess penalties when prepayments are inadequate. They may have their own threshold similar to the $1,000 rule for the IRS.”
[READ: A Guide to Tax Deductions for the Self-Employed]
Is There Another Way to Avoid a Penalty?
Making quarterly tax payments isn’t the only way to avoid the penalty. If you have income from another job and you have taxes withheld — maybe you’re a full-time employee but also do some freelance work — you can have more money withheld from your pay as an employee to help cover the extra income.
Or, if you’re married filing jointly, your spouse can have extra money withheld from their pay to cover the extra taxes.
“If someone is working for a company that withholds taxes and they also have a side gig operating at a profit, it will be easier for them to increase withholding from the employer instead of making estimated tax payments,” Foss says. “They would not need to notify the employer as to why they want the tax payments to be increased.”
How to Adjust Your Withholding
To adjust your withholding, submit a new Form W-4 to your employer requesting they withhold extra money for taxes each pay period.
“If you have the option to increase withholding to cover estimated taxes, that is preferable,” Thornton says. “The reason withholding is better is that all withholding is treated as being paid equally throughout the year, even if it is increased late in the year. Estimated tax payments are credited when the payment is received. Especially if someone is behind on estimates for the year, adjusting withholding is a great option.”
In addition, you may be able to request withholding from certain kinds of income, such as unemployment benefits or IRA withdrawals. If you are receiving unemployment benefits, you can ask to have taxes withheld from your payments when you apply for benefits, or you can file IRS Form W-4V Voluntary Withholding Request with your state unemployment office.
Keep in mind that you can request only 10% of each payment be withheld from your unemployment benefits for federal income taxes. You can also use this form to request withholding from Social Security benefits.
[READ: Tax Prep Checklist: Collect These Forms Before Filing Your Taxes.]
You can also request to have more money withheld for taxes when you take IRA withdrawals, which can be a good option for retirees who are paying taxes on tax-deferred retirement income.
Foss says that withholding from IRA withdrawals is voluntary but if you decide to elect federal withholding from them the minimum rate is 10% (there is no maximum rate).
“People who are both self-employed and making IRA withdrawals could try to pay all of their taxes using tax withholding from retirement distributions,” Foss says. Contact your IRA administrator to request the withholding amount when you take withdrawals.
“I have clients who simply take an IRA distribution in December and allocate the entire amount to taxes being withheld,” Morris Armstrong, enrolled agent in Cheshire, Connecticut, says. “That works because taxes withheld are deemed to be distributed evenly throughout the year.”
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Surprise: There’s Another Tax Deadline on April 18 originally appeared on usnews.com
