Posted by James Financial Services Inc

Understanding Estimated Taxes: When To Pay And How They Work

Understanding Estimated Taxes: When To Pay And How They Work

The employer will take a part of your salary and send it to the IRS for people paid regularly, which happens via withholding taxes. People that are self-employed or paid via non-wage income will need to set aside some money and pay estimated taxes four times per annum. 


What is estimated tax?

If you do not pay federal tax on an income in a year, you will pay other taxes like estimated taxes. Wage-earners can avoid this by boosting the amount they withhold from their typical job. 

Here are some incomes that are not subjected to withholding tax:

  • Alimony

  • Dividends

  • Rents

  • Prizes

  • Compensation for unemployment 

  • Capital gains

  • Interests

  • Social Security benefits, etc. 

Uncle Sam intends that the IRS gets its cut as people earn. As a result, there are penalties and interest for late-payments and underpayments. 

The 2020 Coronavirus pandemic triggered a relaxation with some tax deadlines, which was extended. Also, this led to the shifting forward of interest and penalties. 

In 2019, the deadline for the 1040 tax return was moved to July 15 from April 15. This also led to the estimated taxes' first and second quarterly payments to the same date July 15, from April and June 15. There are currently no adjustments for the 2021 tax year, even though it could change as COVID-19 is yet to be gone for good. 


Who pays estimated taxes?

Uncle Sam believes that you must pay estimated taxes if you will likely have over $1,000 in extra taxes after calculating your withholding and refundable credits in the year. There are, however, unique rules for fisherman and farmers. 

There are some provisions, however, for taxpayers to help them avoid penalties from underpayment. For instance, you have no issue if 90% of your tax bill owed in 2021 pays for your withholding. On the other hand, for people in the dark on what they will pay the following year, paying the 2020 tax bill's exact value can keep you from penalties and interest. 


Estimated Taxes Due Date

Filing deadline for upcoming estimated taxes:

Estimated tax Due 

Income Received

January 15, 2021

September 1 – December 31, 2020

April 15, 2021

January 1 – March 31, 2021

June 15, 2021

April 1 – May 31, 2021

September 15, 2021

June 1 – August 31, 2021

January 18, 2021

September 1 – December 31, 2021


Ideally, the deadline date for estimated tax is the 15th day of the month. Should this be a federal holiday or weekend, it will be shifted to the following week day. In Jan 2022, for instance, when January 15 is a Saturday, and Mon January 17 is a holiday as well (Martin Luther King Jr Day). As a result, the 2021 fourth-quarter tax deadline will be January 18, 2022.


Determining What You will pay 

Taxpayers will need Form 1040 ES to determine their estimated taxes alongside vouchers they will forward with the amount they are paying using check or money order. This is a straightforward calculation that any tax software or your tax accountant will handle.  

In deducing what you owe, consider the deductions you took alongside the income you claimed on your federal tax return for the previous year. You need this to know if you can compare it with the current year. Also, you need to check if you already applied the tax refund of the previous year to the current year's taxes. 

People in the high earning category with an income of $150,000 and above for single or married joint filers ($75,000 for married filing individually) will need to meet safe harbor rules by paying 110% of the previous year's tax liability.


FOR MORE INFORMATION OR TO SEE HOW JAMES FINANCIAL SERVICES, INC. CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.


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