How to Determine if you Need to Make Quarterly Estimated Tax Payments

If you make money from a business, rental property, or other investment property, you may have a federal quarterly estimated tax payment obligation. See the steps below to avoid underpayment penalties.

Difficulty: Moderate

Instructions

Things You'll Need:

• Calculator
• Prior Year Tax Return
• IRS Estimated Tax Worksheet

1. Whether or not you need to make quarterly estimated tax payments is based on several criteria:
   1. What you expect to owe (if anything) when you file your current year tax return
   2. What you expect your current year tax liability to be
   3. What your prior year tax liability was

2. If you expect to owe less than a $1,000 when you file your current year tax return (meaning that after factoring in any withholding and other credits, you will be paying less than a $1,000 with your tax return), you do not need to make quarterly estimated tax payments.

3. If you expect your withholding and credits to be less than the smaller of:
   -90% of your current year tax liability or
   -100% of your prior year tax liability (110% for taxpayers with an AGI greater than $150,000)
   and the amount you will owe is greater than $1,000, you need to make quarterly estimated tax payments.

4. The IRS provides a worksheet to help you estimate what your current year tax liability will be and what amount of estimated payments you should make. See the resources section.

5. You pay your quarterly estimated tax payments by sending in form 1040-ES to the government along with your check or money order. The quarterly due dates are April 15, June 15, September 15, and January 15.

Tips & Warnings

• If you expect to owe a lot more for the current tax year then you did for the prior year, the easiest and quickest way to determine how much to pay is to take your prior year tax liability (multiply by 110% if AGI is greater than $150,000) and subtract your estimated withholding and credits. Divide the amount remaining by four--this is how much you should pay for estimated payments to avoid underpayment penalty.
• If your only income is from wages but you calculate that you need to be making estimated tax payments, you should adjust your withholding by providing your employer with a revised form W-4.
• See IRS Publication 505 for more guidance and details on complex situations
• If your tax situation is complicated, it is best to consult a CPA to advise you.
• Different rules may apply if you are a farmer or professional fisherman. See IRS publication 505.

Resources

• IRS Publication 505
• Form 1040-ES