How to Pay Federal Estimated Taxes Online to the IRS

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taxes pen calculatorAs a small business owner and freelancer, I’m amazed by how quickly my friends with full-time jobs get their taxes done. Their employers withhold taxes year-round, and all that my friends have to do is file by the IRS tax deadline in April to get a tax refund check in May. It’s like magic. But if you don’t have a human resources department putting tax money aside for you, you’ll have to pay estimated taxes four times a year.

Paying estimated taxes essentially means that you take a rough guess at how much you made during the past quarter and send the federal government (and state, if yours requires it) some money to cover the tax liability you accrued. You have to keep relatively current, or the IRS will hit you with an underpayment penalty.

This system helps the government maintain a reliable schedule of when money’s coming in, and it protects you from having to cough up all the dough at once. While it’s some extra work, filing your estimated tax payments for each quarter helps you stay on top of your taxes. With some careful preparation, your estimated tax can be like magic too.

What Are Estimated Tax Payments?

When you work full-time, your company will withhold federal, state, and any local taxes from your paycheck automatically. With each pay cycle the money automatically goes to the IRS, so when tax filing season comes around, you just let the IRS know how much you’ve already sent and then either send the rest or wait for your refund. If you’re in business for yourself, however, you need to be your own HR department and regularly send the IRS money yourself.

Your payment is called “estimated tax” because you’ll estimate your income and tax liability for the quarter. If your profits go up, you’ll estimate the increase in the taxes you owe for the quarter.

In the end, the IRS doesn’t differentiate between withholding and estimated tax payments. Money is money, and all the government wants is to receive it regularly, rather than in a lump sum in April. To avoid penalties, you need to know if you’re responsible for estimated taxes, and how to determine and send your payments efficiently.

Do You Need to Pay Estimated Taxes?

If you fall into one of these two groups, you most likely need to make estimated tax payments:

1. Self-Employed Full-Time Workers and Small Business Owners
If you pay yourself and don’t have any taxes withheld, you’ll definitely need to pay estimated taxes on a regular basis, especially if you plan to keep working for yourself for a while. Each quarter, you will determine approximately how much you’ve made in profit, and how much your tax liability has gone up. You can easily make your payment through the electronic federal tax payment system before the quarterly deadlines. After the year ends, you’ll have until January 15 to pay the previous quarter’s taxes, so use that time to “settle up” and make sure your prior estimates and forecasts were accurate.

2. Freelancers with a Regular Job that Withholds Taxes
If you have a full-time job with tax withholding but you’ve picked up some work on the side, then you’ll need to determine how much of your income is untaxed. If your freelance work constitutes a significant portion of your income, you should probably pay estimated taxes. A good rule of thumb is that if your side income doesn’t come to more than 10% of your gross income (earnings before taxes) from your regular job, then you’re probably not going to need to make estimated tax payments.

Why not? If your gross income from your job is 90% of your total income, and your W-4 tax form has your withholding set up correctly, then your employer should be withholding the required 90% of your taxes owed for the year. That’s the threshold for the underpayment penalty, so you should be in the clear. But if your side income fluctuates through the year, you’ll want to determine how much extra cash you earned each quarter to make sure you’re meeting the necessary tax payments.

How to Estimate Your Taxes

Tax preparation is tough enough once a year – so how will you figure out how much you owe by the quarter? Don’t worry, you don’t have to go through the whole tax filing mess four times a year. But, if you don’t stay on top of your accounting, it’s still going to be very painful. Your smartest move is to keep your accounting software and data up to date.

Outright is a great option that will also provide you with quarterly estimated taxes. Other accounting programs, like QuickBooks, will allow you to prepare a simple profit-and-loss statement for the year through the current date. Take that profit statement and plug it into the H&R Block Tax Estimator or any other tax estimating tool by a reputable company. The calculator will tell you your total tax liability up to that point in the year. You’ll get a simple estimate to print, date, and save with your tax paperwork. For each subsequent quarter, enter into the calculator your profit to, subtract what you’ve already paid, and send the federal government the rest.

That’s all! The IRS isn’t interested in making your life difficult, just in getting what you owe them. If you are making a good faith effort to estimate accurately, they’ll accept the quick calculator results. At the end of the year, you can do a more thorough calculation and make up any shortfall with your fourth quarter payment.

If your only goal is to avoid the underpayment penalty, check out our section below on the minimum requirements you need to meet to avoid this penalty. As one example, regardless of what you make this year, as long you pay at least 100% of what you owed in taxes in the prior year (110% if your gross income was greater than $150,000), you will not be faced with a penalty.

How to Pay Estimated Taxes

If you’ve used the tax calculator, then you’re already finished with the hard part. Submitting the payment is far easier, and it’s even more efficient now that the IRS has fully embraced electronic payment options. You can use the EFTPS (Electronic Federal Tax Payment System) to make your payment quickly and simply. Registering with EFTPS isn’t complicated: You just need a bank account, social security number or employer identification number, and a mailing address. You must use the mailing address that the IRS has on file, and they’ll mail you a PIN in about a week. Using that PIN, you can get into their website anytime to schedule a payment. Once you set up your bank account with EFTPS, you can schedule withdrawals up to 120 days in advance. It’s free and secure.

When to Pay

You should pay taxes on the earnings from each quarter after the quarter has ended. The IRS is apparently not very good at division as the quarters aren’t equal. Don’t let the June deadline surprise you.

Estimated tax payment deadlines are below:

  • First Quarter (January 1 to March 31): Estimated taxes due April 15
  • Second Quarter (April 1 to May 31): Estimated taxes due June 15
  • Third Quarter (June 1 to August 31): Estimated taxes due September 15
  • Fourth Quarter (September 1 to December 31): Estimated taxes due January 15 of the following year

Escaping the Underpayment Penalty

Sure, you won’t want to pay taxes four times a year, but if you don’t pay at least 90% of the taxes you’ll owe for the previous year by January 15, you’ll have to pay a steep underpayment penalty (an annualized 4% for the number of days your payment was late). Unless, that is, you meet one of the exceptions to the rule. The IRS won’t apply the penalty if any of these situations apply to you:

  1. You’ve already paid (through estimated tax payments or withholding) as much as you paid in taxes last year. For example, if you paid the IRS $3,000 last year, and you’ve already paid the IRS $3,000 this year, you won’t get hit with the penalty – even if you ultimately end up owing them much more money. The one exception is that you must pay 110% of last year’s tax liability if your gross income was at least $150,000.
  2. Your tax liability is $1,000 or less for the entire year.
  3. Your total withholding for the year is within $1,000 of your total tax liability on the deadline. For full-time workers with freelance projects on the side, for example, if your extra work doesn’t raise your tax liability by more than $1,000, you won’t pay a penalty.
  4. You had some withholding or made some estimated tax payments, but you had a genuinely lower tax liability this year than last year. Most underpayment penalty rules are written for people who made more money than the year before. If this year you owe less in taxes than last year, but you paid it on time, you won’t get an underpayment penalty.

Final Word

The IRS can get pretty testy if you earn income all year without paying taxes as you go. They’ll get even more upset if you wait a long time to pay. But they’re pretty understanding when it comes to inconsistent income, and if you earn money later in the year they’ll forgive you for not paying ahead of time. For example, if you didn’t earn any untaxed income until the third quarter, you will still need to pay your estimated taxes by September 15, but you won’t get dinged for a late payment.

Tax calculators can help you take the guesswork out of estimating your taxes, but in the end you’re still just making your best approximation. That means that there’s still room for error and the IRS can sneak up on you with penalties if you’re not careful. If you’re a “better safe than sorry” taxpayer, and you’re concerned about underpayment, you can either increase your federal income tax withholding allowances if you have a full-time job, or overestimate what you might owe if you’re self-employed. The IRS doesn’t charge you a penalty for sending them too much money, of course.

In the end, the estimated tax process is built to prevent you from facing a frightening tax bill in April. The IRS wants to get paid and doesn’t want you to be stuck with an amount due that you can’t handle. While it might be a painful process throughout the year, estimated tax is the little bit of hand-holding that some self-employed people and small-business owners need to stay on track with tax payments throughout the year.

Are you making quarterly estimated tax payments? What tools do you use to estimate your tax due and make sure you don’t miss deadlines?

Categories: Money Management, Taxes

  • AJ

    If I’m paying the IRS my income taxes in quarterly installments, and my estimates are fairly accurate, shouldn’t I owe little to no money on April 15?

    Why is it that I always end up having to pay a few thousand dollars in taxes?

    • Kira Botkin

      It sounds like your estimates are in fact not fairly accurate, then. How are you doing you estimates?

      • AJ

        It seems like I end up paying double after I submit my April 15 taxes. I end up overpaying and getting a refund check because the instructions are confusing for someone who never went to business school or studied accounting. I’m a sole proprietor performing freelance technical services. They didn’t cover this stuff in my major.

        Maybe I’m confusing the purpose of the annual and quarterly payments?

        • AJ

          I pay the quarterly taxes, but then after I complete the annual form, it tells me I owe more, so I pay more, and then I get an overpayment check.

        • Kira Botkin

          It sounds more like it is time for you to use an accountant or go to a tax preparation company.

        • Kira Botkin

          The annual payment is not supposed to happen if you are making quarterly payments. The taxes you pay on April 15th are just to make up for whatever you didn’t pay the year before because you didn’t estimate high enough – you should be paying the majority of your taxes through the quarterly payments during the year. Like the poster above, you may not be adding those quarterly payments to your “paid” column, or your estimates may be way under.

  • Will Keyworth

    hi there, thanks for your great information. i am registered with the eftps but i don’t know what form number my EQTP is. is there one in the drop down? or do i have to manually add the tax form number? thanks. sorry for seeming dum. i’m an artist not a numbers person!

  • Will Keyworth

    hi there, thanks for your great information. i am registered with the eftps but i don’t know what form number my EQTP is. is there one in the drop down? or do i have to manually add the tax form number? thanks. sorry for seeming dum. i’m an artist not a numbers person!

  • JohnB

    How will I report the quarterly payments I’ve made to the IRS in 2012 on my 2012 tax return? or does the IRS send me something like a 1099?

    • Kira Botkin

      Line 63 – 2012 estimated tax payments. They do not send you anything.

  • Randi

    Could you pay weekly or even monthly instead of quarterly? And if you over estimate what you owe will you get a refund check come April?

    • Kira Botkin

      Yes, you can pay the IRS as often as you like. And if you pay them too much they will send you a refund.

  • Shannon

    I pay mine by the quarter, looking back and re figuring some stuff I feel like I have already overpaid. My question is, if I don’t pay for the jan quarter will I be penalized?