The U.S. tax system operates on a pay-as-you-go basis. This means that taxpayers need to pay most of their tax during the year, as the income is earned or received. Taxpayers must generally pay at least 90 percent (however, see 2018 Penalty Relief, below) of their taxes throughout the year through withholding, estimated or additional tax payments or a combination of the two. If they don’t, they may owe an estimated tax penalty when they file.
The IRS has seen an increasing number of taxpayers subject to estimated tax penalties, which apply when someone underpays their taxes. The number of people who paid this penalty jumped from 7.2 million in 2010 to 10 million in 2017, an increase of nearly 40 percent. The penalty amount varies but can be several hundred dollars.
The Tax Cuts and Jobs Act, enacted in December 2017, changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding. As a result, many taxpayers may need to adjust the amount of tax they pay each quarter through the estimated tax system.
Who may need to pay estimated taxes
Individuals, including sole proprietors, partners and S corporation shareholders, may need to make estimated tax payments if:
*they expect to owe at least $1,000 when they file their tax return.
*they owed tax in the prior year.
Taxpayers who may need to make estimated tax payments include someone who:
*receives income that isn’t from an employer, such as interest, dividends, alimony, capital gains, prizes and awards.
*has tax withheld from their salary or pension but it’s not enough.
*has more than one job but doesn’t have each employer withhold taxes.
*is self-employed.
*is a representative of a direct-sales or in-home-sales company.
*participates in sharing economy activities where they are not working as employees.
Wage-earners and salaried employees can avoid estimated tax payments by having their employer withhold tax from their wages. To determine the right amount to withhold, use the Tax Withholding Estimator , available on IRS.gov. Then, based on its recommendations, they can use Form W-4, Employee’s Withholding Allowance Certificate, to tell their employer how much tax to withhold from their pay. Anyone can change their withholding any time during the year.
When to pay estimated taxes
For estimated tax purposes, a year has four payment periods. Taxpayers must make a payment each quarter. For most people, the due date for the first quarterly payment is April 15. The next payments are due June 15 and Sept. 15, with the last quarter’s payment due on Jan. 15 of the following year. If these dates fall on a weekend or holiday, the deadline is the next business day.
Farmers, fishermen and people whose income is uneven during the year may have different rules.
If a taxpayer doesn’t pay enough or pays late, a penalty may apply.
