Estimated Taxes: Tips, Deadlines, and Deductions Explained

Handling estimated taxes might seem like just another task on your to-do list, especially if you’re earning income without automatic tax withholding, like many freelancers, small business owners, and investors. Recently, the Internal Revenue Service (IRS) emphasized the importance of these payments to keep you on track with your tax obligations.

It is incredibly important to understand your estimated taxes effectively. Not only can it help you avoid penalties, but it also ensures your financial health. To make things easier, we’ve gathered all the essential information you need.

In this guide, we will cover everything you need to know about estimated taxes. From understanding who needs to pay, managing payments, and exploring valuable deductions, we’ll help you handle your estimated taxes efficiently and keep your finances in check.

What are Estimated Tax Payments?

Estimated taxes are regular payments you make on income that don’t have taxes taken out automatically. Instead of paying all your taxes once when you file your tax return, you pay smaller amounts throughout the year. This helps spread your tax payments and prevents you from spending a big lump sum at tax time.

Conditions for Making Estimated Tax Payments

You generally need to make estimated tax payments for the current year if:

1. You expect to owe at least $1,000 in taxes after subtracting your withholding and refundable credits.
2. Your withholding and refundable credits will be less than either:
   • 90% of the tax you’ll owe for this year, or
   • 100% of the tax you owed last year (as long as last year’s tax return covered all 12 months).

Why Paying the Estimated Taxes is Important?

Paying estimated taxes is crucial for several reasons:

• Avoiding Penalties: If you don’t pay enough tax throughout the year, you could be hit with an underpayment penalty. The IRS imposes these penalties to encourage timely tax payments.
• Managing Cash Flow: Regularly paying estimated taxes helps manage your finances by preventing a large, unexpected tax bill at the end of the year.
• Staying Compliant: Keeping up with your estimated tax payments ensures you remain compliant with IRS regulations, reducing the risk of audits and additional scrutiny.

Can I Pay Estimated Taxes All at Once?

That’s a good question. Yes, you can pay your estimated taxes in a single lump sum at the beginning of the year. You are not required to pay these in four installments, even though the IRS sets deadlines for them every quarter. Making a full payment at the start of the year can simplify the process and ensure you don’t miss any estimated tax deadlines.

Benefits of Paying All at Once

• Simplicity: One payment eliminates the need to remember multiple estimated tax deadlines.
• Avoiding Penalties: By paying the full estimated tax amount early, you ensure that you avoid underpayment penalties and interest charges.
• Planning: It can make financial planning easier by removing the need to set aside money each quarter.

Drawbacks of Paying All at Once

1. Cash Flow: Paying a large sum at the beginning of the year can impact your cash flow, especially if your income is inconsistent throughout the year.
2. Overpayment Risk: If your income changes significantly, you might end up overpaying your taxes and will need to wait for a refund when you file your annual tax return.

When to pay Estimated Tax?

The IRS suggests taxpayers pay estimated taxes in four equal installments. You can choose to pay more or all upfront if it suits your financial situation. Here are the dates for estimated tax payments and how to do quarterly taxes.

If any of these dates estimated taxes are due and fall on a weekend or a legal holiday, the deadline moves to the following business day.

What Happens if You Miss a Deadline?

If you miss an estimated tax payment deadline, the IRS may penalize you. The penalty is calculated based on the amount of the underpayment and the number of days it’s late. The federal short-term interest rate and three percentage points determine the penalty rate. Additionally, you may also incur interest on the unpaid amount until it is paid. You need to make payments on time to avoid these extra charges​.

How do you Set Reminders to ensure Timely Payments?

To avoid missing estimated tax deadlines, you can use several methods to set reminders:

1. IRS Online Tools: The IRS offers online tools like Direct Pay and the IRS2Go app to help you track payments and manage the estimated tax payment schedule. You can use these tools to set up notifications and reminders.
2. Calendar Alerts: Use your digital calendar (like Google Calendar or Outlook) to set alerts a few days before each deadline.
3. Tax Software: The IRS suggests using the Electronic Federal Tax Payment System (EFTPS) for scheduling and tracking estimated tax payments​
4. Manual Reminders: Mark the dates in a physical calendar or planner that you check regularly.

These reminders can help you stay on top of your payments and avoid penalties.

How to Calculate Estimated Taxes?

Here’s a simple pathway to guide you through the steps of calculating estimated taxes:

1. Estimate Your Total Income: Think about all the money you expect to make this year. This includes self-employment income, interest, dividends, rental income, and other sources.
2. Calculate Your Adjusted Gross Income (AGI): From your total income, subtract any adjustments like IRA contributions, student loan interest, and self-employment health insurance deductions. This gives you your AGI.
3. Determine Your Taxable Income: Subtract your standard deduction or itemized deductions from your AGI. This will give you your taxable income.
4. Apply the Tax Rates: Use the current IRS tax brackets to calculate the tax on your taxable income.
5. Subtract Tax Credits: Reduce your tax by any credits you qualify for, such as the Child Tax Credit or education credits.
6. Calculate Self-Employment Tax: If you are self-employed, calculate your self-employment tax and add it to your income tax.
7. Total Your Estimated Tax: Add your income tax and self-employment tax together to find your total estimated tax for the year.
8. Use Last Year’s Return as a Guide: Look at your tax return from last year. Use the information as a reference to help estimate this year’s taxes.
9. Adjust for Changes: If you expect your income, deductions, or credits to change this year, make adjustments to your estimates.
10. Use the Form 1040-ES Worksheet: Fill out the worksheet in Form 1040-ES to help calculate your estimated tax. If your estimates change during the year, fill out a new worksheet for the next quarter to recalculate your payments.

By following these steps, you can accurately estimate your taxes and avoid any surprises at tax time.

If you need assistance, we are here to help. SWAT Advisor offers a comprehensive range of additional services too, including being a tax planner in California and beyond, providing expert tax planning services, offering advanced tax planning strategies, and delivering innovative tax planning solutions to meet all your financial needs.

Deductions for Those Paying Estimated Taxes

Paying estimated taxes is crucial for individuals and businesses who earn income that is not subject to automatic tax withholding. Using relevant deductions can significantly lower taxable income, thereby reducing the estimated tax payments. Here are the key deductions applicable:

IRA Deduction Limits

Contributions to Individual Retirement Accounts (IRAs) are a valuable deduction for self-employed individuals, freelancers, and small business owners. These contributions reduce your taxable income, which in turn lowers your estimated tax payments.

For 2024, the contribution limit for a traditional IRA is $6,500 if you are under 50 and $7,500 if you are 50 or older. These contributions can be deducted from your taxable income, thus lowering your overall tax liability and reducing the amount of estimated taxes owed each quarter.

Employee Retention Credit

The Employee Retention Credit (ERC) is available to small business owners who retained employees during specific periods, such as the COVID-19 pandemic. This credit directly reduces the total tax liability, affecting the estimated tax payments. Small business owners who retained employees during qualifying periods.

The credit reduces the employer’s share of Social Security tax, providing a direct reduction in the tax payments required. This helps in managing cash flow and reduces the amount needed for estimated tax payments.

Business Credits and Deductions

Freelancers, independent contractors, and small business owners can deduct various business-related expenses. These deductions reduce taxable income and are crucial for calculating accurate estimated tax payments. Freelancers, independent contractors, and small business owners.

Deductible business expenses like office supplies, professional services, travel, marketing, and utilities lower your taxable income, directly affecting the estimated taxes owed.

Penalty for Underpayment of Estimated Tax

If you don’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may be subject to a penalty for underpayment. Here’s what you need to know to avoid or manage these penalties.

When do penalties apply?

Penalties for underpayment of estimated taxes apply if:

• You owe more than $1,000 in tax after subtracting your withholdings and credits, or
• You paid less than 90% of the tax for the current year, or 100% of the tax shown on your previous year’s return (110% if your adjusted gross income is over $150,000).

Calculating the Penalty for Estimated Taxes

The penalty is essentially an interest charge on the amount of underpayment for the period it was underpaid. The rate is determined by the federal short-term interest rate plus three percentage points.

You can use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to calculate if you owe a penalty and want to determine the amount.

How to Avoid the Penalty?

Avoiding penalties for underpayment of estimated taxes involves making timely and accurate payments based on your actual income. Special circumstances may also qualify you for penalty relief.

• Adjust Payments Based on Income: You may be able to avoid or reduce the penalty if your income is uneven throughout the year. You can annualize your income and make unequal payments based on the actual income received during each period. This method helps to reduce or eliminate the penalty.
• Special Circumstances for Penalty Waivers: The underpayment was due to a casualty, disaster, or other unusual circumstance, and it would be unfair to impose the penalty. You retired (after reaching age 62) or became disabled during the tax year, and the underpayment was due to reasonable cause and not willful neglect.

Summing Up!

Handling estimated taxes can be tricky for everyone, whether you’re a freelancer, small business owner, investor, or someone with a unique income situation like farming or fishing. The good news is that there are specific criteria that might allow you to pay less. For example, if more than two-thirds of your income comes from farming or commercial fishing, you’re considered a qualified farmer or fisherman. This special status can change how and when you pay your estimated taxes, making it easier and possibly cheaper for you.

But what if you’re unsure whether you qualify, or need help figuring out your situation? Whether you’re dealing with income from freelancing, business, investments, or specialized fields like farming or fishing, Swat Advisors can assist you. They can help you determine your taxable income, identify qualifying portions, and ensure you’re taking advantage of any potential tax benefits.

SWAT Advisor offers additional services, including financial advisors for dentists, family tax services, and specialized financial planning for doctors and has best real estate agents for financial planning.