Individuals: Understanding Quarterly Estimated Taxes
The payment of quarterly estimated taxes is an obligation that many individuals know must be fulfilled, but oftentimes taxpayers do not fully understand the circumstances under which estimates should or must be paid. This leads to questions such as “why am I subject to quarterly estimated taxes, while my neighbor is not?” and “how can I be subject to the quarterly tax payment requirement one year, and be exempt from this obligation the next year?” There are a few intricacies that govern this topic; this blog aims to provide an understanding of the basic rules that dictate the quarterly estimated tax requirement.
WHO IS SUBJECT TO QUARTERLY PAYMENTS?
Federal income tax is generally paid as income is received—which is why the average taxpayer (i.e. one who works and receives a W-2) has taxes withheld from his or her paycheck each period. Many taxpayers who receive other forms of income (i.e. self-employment, interest, dividends, capital gains, rents or royalties) typically do not have tax withheld on that income—and as such, these individuals are usually subject to quarterly estimated taxes. Generally, the IRS requires that your estimates be paid in four equal, quarterly installments. However, there are exceptions if your income is earned unevenly throughout the year. The estimated tax payment rules apply to U.S. Citizens, resident and nonresident aliens, and residents of U.S. Territory countries such as Puerto Rico and the U.S. Virgin Islands.
In general, individuals must pay quarterly estimated taxes if they expect to owe at least $1,000 for the year (after subtracting withholdings and refundable credits), and if they don’t expect withholdings to cover 90% of their tentative current year tax or 100% of the prior year tax. The “safe harbor” rule related to estimated taxes specifies an amount equal to 90% of the current year tax or 100% of the prior year tax (110% of your income is over $150,000). In situations in which your income is increasing, it’s best to pay off the prior year safe harbor amount and defer payments until the tax return is due. If your income is decreasing, it’s typically best to pay based on the current year safe harbor amount so that you don’t wildly overpay (effectively giving the IRS an interest-free loan). If a taxpayer does not pay enough tax during the year, either through withholding or through quarterly estimated taxes, he or she might have to pay a penalty.
Other entities, such as corporations, trusts, and private foundations, may also be subject to estimated tax payment rules. It is important to communicate with your CPA or certified advisor regarding the specific rules for such entities.
DEADLINES: WHEN TO PAY
For quarterly estimated tax purposes, the year is divided into four income periods. Each period has a corresponding payment due date. The relative due dates are as follows:
|Payment Period||Due Date|
|Jan. 1 – March 31||April 15|
|April 1 – May 31||June 15|
|June 1 – August 31||Sept. 15|
|Sept. 1 – Dec. 31||Jan. 15 (of the following year)|
For fiscal-year taxpayers (those whose tax year does not begin on January 1), see the special rules referenced in Chapter 2 of IRS Publication 505.
DETERMINING YOUR QUARTERLY ESTIMATED TAXES
The computation of your required quarterly estimated taxes could be complex. If you have varying types of income (or expenses) that are received at different periods throughout the year and aren’t subject to tax withholding, it’s likely that you will need to consult your CPA or advisor to assist with determining your quarterly estimated tax requirement. The recent tax reform enactment carries key changes in tax law across the board, which are more than likely to affect your projected tax liability for 2018—and thus your estimated tax requirements.
It is important to note that many states also have their own respective quarterly estimated tax payment rules, which typically follow the federal payment due dates. If you have income sourced from multiple states, even if it is not your resident state, you may be subject to that state’s respective quarterly estimate rules. It is always recommended that you consult your trusted advisor to help you determine what your state quarterly estimated tax payment mandate is for the current year.
FOR MORE INFORMATION
The purpose of this blog was to dissect the current standard rules governing the quarterly estimated tax requirement for individual taxpayers; though it should not be used as a full guide to the specific requirements that apply to you. We encourage you to contact us with any questions you may have related to your estimated taxes or other tax matters. For such inquiries, or for information about our services, please contact us at firstname.lastname@example.org or (212) 245-5900.
Deven M. Conner, CPA, EA is a Tax Professional with FF&F. He is an IRS Enrolled Agent and has over 10 years of combined tax and public accounting experience comprised of family office groups, private equity firms, and forensic accounting. Deven has a strong background in individual, fiduciary, and partnership taxation. His diversified experience in the private and public sectors, which include a Big Four firm and top mid-size public accounting firm, serves as a solid foundation for his unique and comprehensive understanding of taxation.