Graham | Adams is ready to help with your federal tax estimation. It is an essential process for individuals and businesses to ensure you are paying the right amount of tax throughout the year. If you are self-employed, earn additional income outside of a traditional job or receive income that isn’t subject to automatic withholding, you will likely need to make estimated tax payments to the IRS.

What Are Estimated Tax Payments?

Estimated tax payments are periodic tax payments made directly to the IRS by taxpayers who are self-employed, freelancers or individuals with income that is not subject to automatic withholding (such as interest, dividends or rental income). These payments are used to cover your tax liability throughout the year. Instead of paying a lump sum of taxes when you file your return, estimated payments allow you to spread out your payments to match your earnings as they come in.

Who Needs to Make Estimated Tax Payments?

You may need to make estimated tax payments if:

• Self-Employed Individuals: If you’re a freelancer, contractor, or small business owner, your income isn’t subject to automatic withholding. You must estimate your taxes and pay quarterly.
• Income Not Subject to Withholding: This includes income from investments, rental properties, alimony (received), dividends and interest.

• If You Expect to Owe $1,000 or More: If you expect to owe $1,000 or more when you file your tax return, the IRS generally requires you to make estimated payments. This is based on the amount you expect to owe after subtracting withholding and refundable credits.
• Retirees and Investors: People who earn significant income from retirement accounts, pensions, or investment income may need to make estimated tax payments if withholding on those sources isn’t sufficient.

How to Calculate Estimated Tax Payments

To calculate estimated taxes, you will need to estimate your total income, deductions and credits for the year. Here’s how the process generally works:

• Estimate Your Total Income: Estimate all income sources for the year, including wages (if self-employed or if you receive additional income), interest, dividends, capital gains, rental income and other sources of taxable income.
• Calculate Your Taxable Income: Subtract any deductions you're eligible for (standard deduction, itemized deductions, etc.) to calculate your taxable income.
• Apply Tax Rates: Once you have your taxable income, apply the progressive federal income tax rates to calculate your tax liability for the year.

• Account for Tax Credits: Subtract any tax credits you may qualify for, such as the Child Tax Credit, Education Credits or Earned Income Credit, which directly reduce the amount of tax owed.
• Determine Quarterly Payments: Divide your total estimated tax liability by four (since estimated payments are typically due quarterly). This will give you the amount you should pay each quarter.
• Tip:
  These calculations can be complex. The experts at Graham | Adams know all the ins and outs.

Penalties for Underpayment

If you don’t make enough estimated tax payments during the year, you may face penalties and interest on the underpaid amount. The IRS may charge penalties if:

• You owe more than $1,000 when you file your tax return.
• Your estimated payments are less than 90% of your actual tax liability.
• You haven’t paid at least 100% of the prior year's tax (110% if your adjusted gross income is over $150,000).

Avoiding Penalties:

• Pay on time: Ensure your payments are made on or before the due dates.
• Pay enough: Try to estimate your income and tax accurately. If your income varies, you can adjust your payments during the year.

Adjusting Estimated Payments Mid-Year

Your estimated tax payments should reflect your income for the entire year. If you experience a significant change in income, such as a new job, additional freelance work or selling a property, you should recalculate your estimated taxes and adjust your quarterly payments accordingly.

You can adjust your payments by submitting a new Form 1040-ES or by making a larger payment in a future quarter to make up for a missed or insufficient payment.

Federal tax estimations are crucial for those who earn income outside of traditional payroll withholding. By accurately estimating and making quarterly payments, you can avoid penalties, reduce the burden of taxes owed when filing and ensure you comply with IRS requirements. Staying organized, tracking your income and adjusting your payments, when necessary, will help keep you on track and avoid surprises at tax time.