Either way, you’ll use IRS Form 1040-ES to show your income estimate and project your tax liability. IRS Publication 505 has all the rules and details, and good tax software will help you fill out the form and do the math. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results.
Essentially, you end up calculating a penalty on the amount that was underpaid at each quarterly estimated tax payment. That’s why employers are responsible for withholding taxes from their employees’ paychecks and depositing those funds with the IRS. If you’re self-employed and have enough taxable income, your quarterly payments essentially take the place of that withholding.
How to calculate your quarterly tax payments
You’ll also calculate the minimum estimated tax you need to make to avoid a penalty. However, it’s much easier if you pay for tax software and it automatically calculates this for you based on the inputs you enter into the tax software. In this case, you’ll have to apply the penalty for underpayment of four percent multiplied by the number of days each part of the underpayment was outstanding. If you’re married to someone who has taxes automatically taken out of their paycheck, they may have enough taxes withheld to cover both of you, Kane explains. You don’t have to pay estimated tax for the current year if you meet all three of the following conditions. You may have to pay estimated tax for the current year if your tax was more than zero in the prior year.
Tax experts can also advise on tax planning strategies to optimize your tax situation, potentially leading to lower overall tax liabilities. Their expertise is particularly valuable for those with complex tax situations, such as business owners or individuals with multiple income sources. Navigating the complexities of IRS penalties, specifically the penalty for underpayment of estimated quarterly tax payments, can be daunting. This article demystifies the topic, explaining the intricacies of underpayment and how to avoid penalties. For anyone dealing with quarterly tax payments, understanding these nuances is vital to staying compliant and avoiding unnecessary financial burdens. Using the Electronic Federal Tax Payment System (EFTPS) is the easiest way for individuals as well as businesses to pay federal taxes.
What is Underpayment of Estimated Tax?
When you use Taxfyle, you’re guaranteed an affordable, licensed Professional. Your total tax was zero if the line labeled “total tax” on Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S Tax Return for Seniors was zero. Maurie Backman is a personal finance writer covering topics estimated tax ranging from Social Security to credit cards to mortgages. She also has an editing background and has hosted personal finance podcasts. To learn more, check out our article on the annualized income installment method, which breaks down the calculations involved (with plenty of examples).
- Better yet; you can pay online, by phone or from your mobile device using the IRS2Go app.
- This is because, in addition to late payment penalties, interest is also charged on top of the amount, meaning you’ll pay more the longer you wait.
- Include a copy of both the written request for advice you sent us and our written response.
- The easiest way for self-employed individuals to calculate their state estimated quarterly tax payments is to prepare an estimated state tax return for that year.
