Taxes Are Paid on Income While It is Earned

All taxpayers whether an individual or a business must pay federal income tax to the IRS as they earn their income during the year. The majority of individuals usually have their federal income tax paid through their W2 wages. If a person is retired, they have their federal income tax paid through withholdings on their pension, IRA distributions or even their social security.

If there are not enough taxes are withheld on these sources of income, then the individuals should make estimated tax payments. If a person is self-employed or works in the gig economy then the individual should also make estimated tax payments to the IRS on their earned income during the year.

What Happens if Estimated Tax Payments Are Not Made

If an individual does not make estimated tax payments and they were required to do so, then they will be charged a penalty for underpayment of estimated tax. As a general rule most taxpayers can avoid this penalty if they owe less than $1,000 or if they paid in taxes at least 90% of the tax for the current year, or 100% of the tax shown on their tax return for the prior year.

How To Pay

An estimated tax payment to the IRS can be paid in several ways. The payment can be paid via a paper check and mailing a payment voucher form 1040ES to the IRS. Estimated tax payments can also be made via the IRS website or through the Electronic Funds Transfer Payment Systems (EFTPS). To use the EFTPS payment system you must be enrolled to use this system.

When To Pay

As a general rule, estimated tax payments should be paid four times a year. The payments are due 15 days after the end of each quarter. If you make payments on line, you are able to make monthly payments instead of waiting till the end of the quarter.

For Individuals who are self employed or whose income fluctuates greatly due to a large capital gain or the sale of real estate, it is important to make estimated tax payments. Otherwise penalties will be assessed that could have been avoided.