Most people never have to worry about making estimated tax payments because an employer withholds a percentage from wages or salaries. However, if you are self-employed or have significant outside income with no tax withholding, you have to make estimated payments unless your estimated tax liability is less than $1,000. You can use a worksheet in IRS Publication 505 to determine whether you need to make estimated payments.
Usually estimated payments are made quarterly, due on the 15th of April, June, September and January of the next year. However, you may be able to annualize your payments to compensate for unequal income, not distributed evenly by quarters. You'll have to complete a Form 2210 to calculate payments in this case, but your total estimated payments must equal 90 percent of your liability for the tax year.
The IRS imposes a penalty for late or insufficient payments. As of 2012, that's 5 percent, calculated from the due date until the payment is made. If your payment is a month late, you'll owe 5 percent of the amount of the payment for that month, for instance about $2 on a $500 quarterly payment.
Delaying payment of estimated taxes can actually be a way to get a short-term loan at low interest. If you need that $500 for an emergency, just delay that quarterly payment by a month and pay the penalty. That may be easier and cheaper than getting a $500 short-term loan or taking a cash advance from a high-interest credit card.
The IRS uses the date of mailing as the date for payment. If your payment is postmarked by April 15, it's considered on time, even if the IRS does not actually receive the check until a week later. There are special exceptions when the 15th falls on a Saturday, Sunday or holiday. You also don't have to make the Jan. 15 payment if you complete and file your Form 1040 tax return by the 31st of that month.
- Internal Revenue Service: Tax Withholding and Estimated Tax
- Internal Revenue Service: Penalty for Underpayment of Estimated Tax
- IRS Tax Attorney: Background Information on IRS Tax Penalty
- Vernon Jacobs, C.P.A.: How to Avoid Estimated Tax Penalties
- SmartMoney: Late Payments of Estimated Taxes Can Be Smart Move
- Fairmark.com: Penalty for Underpayment
- Stock pictures of checks used as a form of payment image by Albert Lozano-Nieto from Fotolia.com