Quarterly Tax Planning: Don’t Wait Until April

 

When it comes to federal income taxes, waiting until April to think about your tax bill can lead to costly surprises. The U.S. tax system is pay-as-you-go, meaning you are expected to pay taxes throughout the year as you earn income not just at tax time. For many taxpayers, especially those with self-employment, investment, or other non-wage income, this means making quarterly estimated tax payments. Proactive quarterly tax planning is essential to avoid penalties, manage cash flow, and take advantage of tax-saving opportunities.

Why Quarterly Tax Planning Matters

The Internal Revenue Code requires individuals, sole proprietors, partners, and S corporation shareholders to pay estimated taxes if they expect to owe $1,000 or more when their return is filed. Corporations must pay estimated taxes if they expect to owe $500 or more. If you only pay at tax time and haven’t had enough withheld or paid in estimated taxes, you may face underpayment penalties even if you’re due a refund when you file your return.

Who Needs to Make Estimated Tax Payments?

You may need to make estimated tax payments if you receive income that isn’t subject to withholding, such as:

• Self-employment or gig economy income
• Interest, dividends, or capital gains
• Rental income
• Retirement distributions, Social Security benefits, or annuities (if not enough tax is withheld)
• Alimony or other non-wage income

If you have a significant change in income such as a large capital gain, a new freelance contract, or a change in marital status your estimated tax obligations may change mid-year. The IRS provides a Tax Withholding Estimator to help you determine if you need to adjust your withholding or make estimated payments.

When Are Estimated Tax Payments Due?

For calendar year taxpayers, the due dates for quarterly estimated tax payments are:

• 1st Quarter: April 15
• 2nd Quarter: June 15
• 3rd Quarter: September 15
• 4th Quarter: January 15 of the following year

If a due date falls on a weekend or legal holiday, the payment is due the next business day.

How Much Should You Pay?

To avoid penalties, you generally must pay the lesser of:

• 90% of the tax shown on your current year’s return, or
• 100% of the tax shown on your prior year’s return (110% if your prior year’s adjusted gross income was over $150,000, or $75,000 if married filing separately)

Special rules apply for farmers, fishermen, and certain other taxpayers.

How to Calculate and Make Payments

The IRS provides Form 1040-ES and Publication 505, which include worksheets to help you estimate your tax liability and required payments. If your income is uneven throughout the year, you can use the annualized income installment method to match payments to when you actually receive income, potentially reducing penalties.

Payments can be made electronically via IRS Direct Pay, the Electronic Federal Tax Payment System (EFTPS), the IRS2Go app, or by mailing a check with a payment voucher.

The Benefits of Year-Round Tax Planning

• Avoid Penalties: Timely payments help you avoid underpayment penalties and interest.
• Manage Cash Flow: Spreading payments throughout the year can make tax bills more manageable.
• Tax Savings: Proactive planning allows you to adjust retirement contributions, charitable giving, and other deductions before year-end.
• No Surprises: Regular checkups help you adjust for life changes marriage, divorce, new dependents, or changes in income.

Mid-Year and Year-End Checkups

The IRS and Taxpayer Advocate Service recommend a mid-year tax checkup. Review your paystubs, estimated payments, and any changes in your financial situation. Use the IRS Withholding Estimator and adjust your Form W-4 or estimated payments as needed.

Don’t Wait Start Planning Now

Quarterly tax planning isn’t just for the self-employed. Anyone with non-wage income or complex tax situations can benefit. Organize your records, review your income sources, and set reminders for payment deadlines. If you’re unsure about your estimated tax obligations, consult a tax professional or use IRS resources.

External Resources:

• IRS Estimated Taxes
• IRS Tax Withholding Estimator
• Publication 505: Tax Withholding and Estimated Tax
• Form 1040-ES: Estimated Tax for Individuals
• Taxpayer Advocate Service: Making Estimated Payments

Have questions about your estimated tax payments or need help with tax planning? Our team is here to help you navigate your tax obligations and avoid surprises. Contact us today to schedule a consultation and ensure your tax plan is on track for the year.