Many people rely on paycheck withholding to manage their tax obligations, but if you're self-employed, receive investment income, or earn income from sources that don’t withhold taxes, you may need to make estimated tax payments to avoid penalties. Here’s what you need to know.
What Are Estimated Taxes?
Estimated taxes are quarterly payments made to cover income not subject to automatic withholding—such as self-employment earnings, investment income, rental income, and alimony. The IRS requires taxes to be paid as income is earned, so these payments help prevent a hefty bill or penalties at tax time.
Who Needs to Pay Estimated Taxes?
You might need to pay estimated taxes if you expect to owe $1,000 or more in federal taxes after withholding and credits. Common scenarios include:
- Self-Employed or Freelance Income: Taxes aren’t withheld, so you’re responsible for paying income and self-employment taxes (Social Security and Medicare).
- Investment Income: Dividends, interest, and capital gains often require estimated payments.
- Rental Income: Landlords must pay taxes on rental earnings without automatic withholding.
- Other Non-Wage Income: This includes alimony (for pre-2019 agreements), prizes, and royalties.
- High Earners: Even with paycheck withholding, those with bonuses or significant non-wage income may need to pay quarterly.
- Restricted Stock Units (RSUs): Default withholding on RSU vesting may be insufficient for higher tax brackets.
How to Calculate Estimated Taxes
Determining your estimated taxes requires projecting your annual income, deductions, and credits. At Brickley Wealth, we offer comprehensive tax projections to help calculate your liability and determine accurate quarterly payments.
When Are Payments Due?
Estimated taxes are paid quarterly:
- April 15
- June 15
- September 15
- January 15 (of the following year)
If the due date falls on a weekend or holiday, the deadline moves to the next business day. Missing a payment can lead to penalties and interest charges.
Avoiding Penalties
To avoid penalties for Federal, you must pay at least:
- 90% of your current year’s tax liability, or
- 100% of last year’s liability (110% for high earners with adjusted gross income over $150,000).
If you meet specific safe harbor provisions or your total tax bill is under $1,000, penalties may not apply.
Alternatives to Estimated Payments
Prefer to avoid making estimated payments? Consider these options:
- Increase Withholding: Adjust your W-4 with your employer to cover additional tax.
- Leverage Deductions and Credits: Maximize retirement contributions, HSAs, or charitable donations to lower your tax liability.
Stay Ahead of Your Taxes
Paying estimated taxes is crucial for anyone earning income not subject to withholding. Consulting with a CPA can simplify the process, help you avoid surprises, and keep your finances on track. At Brickley Wealth, we’re here to guide you. Let us help you calculate payments, manage your tax strategy, and reduce stress when tax season rolls around.