Estimated taxes for individuals: The who, what, where, when and why

According to the IRS website, “the U.S. tax system operates on a pay-as-you-go basis.” But what does that actually mean for American taxpayers? The concept of estimated taxes is not overly complicated, yet many people do not fully understand what these payments are, or how they work.

So, let’s break down the basics of estimated taxes.

What are estimated taxes?

To put it simply, the IRS wants you to pay a sizeable portion of what you owe in taxes before April 15. Most U.S. employees have federal and state tax withholdings regularly taken out of their wages, which may cover their tax payments for the year.

These tax payments are intended to ensure that you have paid enough tax by April 15. However, under certain circumstances (as outlined below), people need to make estimated tax payments, which are essentially pre-payments required by the government.

However, if you fail to make quarterly tax payments in the correct amounts, then the IRS will assess your penalties that make you pay additional money to the government.

Who needs to pay estimated taxes?

Generally, you owe estimated taxes if you aren’t having tax withheld during the year. The most common rule is that if you expect to owe at least $1,000 when you file your annual tax return, then you need to make estimated tax payments during the year.

Additionally, if you earned significant income in addition to your employment wages – perhaps from dividends, interest or capital gains, or if you own a business or are self-employed – then you generally have to make estimated tax payments.

The estimated tax formula is fairly straight-forward. Generally speaking, you either need to pay at least 90% of your current year’s taxes or 100% of your prior year’s taxes, whichever is less. If your annual income is above $150,000, then your second option is to pay 110%, not 100%, of your prior year’s taxes.

When do you have to pay estimated taxes?

If you fall into one of the above categories, then you’ll have to pay estimated taxes quarterly – by April 15, June 15, Sept. 15 and Jan. 15 – to ensure you have paid enough by the time the following April 15 rolls around.

If any of those dates fall on a weekend or a holiday, then the deadline moves to the next business day.