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What are Estimated Taxes?

Feb 8, 2023 | Tax

The Internal Revenue Service (IRS) wants to ensure all taxpayers prepay their taxes as income is earned throughout the year. Taxes can either be paid through withholding by an employer or by making estimated tax payments four times a year. Tax must be paid on any amount of income earned, including interest, dividends, capital gains, and self-employment income. Business owners, LLC members, and corporations must pay quarterly estimated taxes — and must do so to avoid a financial penalty when it comes time to file. Our New York tax attorneys can help you navigate the hurdles of the U.S. tax code.

Who Pays Estimated Taxes?

Anyone who does not already have their income withheld by an employer is subject to quarterly tax payments. Sole proprietors, individuals, partners, S-corp shareholders, LLC members, and those who are self-employed must pay estimated taxes. The IRS also expects corporations to make estimated tax payments if they are expected to owe a tax of at least $500 when their return is filed. Individuals who expect to owe less than $1,000 on their returns may not need to make estimated payments.  

According to the IRS, those who are exempt from paying estimated tax for this year include individuals who satisfy these criteria:

  • They had no tax liability in the previous year
  • They were a U.S. citizen or resident alien for the entire year
  • Their past tax year covered 12 months

To make an estimated payment, sole proprietors, S-corps, and partners will use IRS Form 1040-ES. Corporations must make their payments with Form 1120-W.

How is Estimated Tax Calculated?

Estimated taxes are due four (4) times a year on a specific due date for the quarter preceding that date  — quarterly taxes must be paid on April 15, June 15, September 15, and January 15. If the due date falls on a weekend or a legal holiday, the taxes are due the following business day. In addition to being aware of your federal tax obligations, you are also responsible for paying estimated state taxes.

To calculate how much you owe in estimated quarterly taxes, add your total tax liability for this year and divide that number by four. Use your income, deductions, credits, and federal tax return for the previous year as a guide. However, calculate your income accurately — failure to pay enough tax by the due date of each quarter can result in a penalty, even if you are owed a refund upon filing your tax return.

What is the Underpayment Penalty? 

The IRS imposes an underpayment penalty on individuals and businesses who have not paid enough in quarterly taxes throughout the year. If you inadvertently missed the quarterly payment date, it’s best to make a payment as soon as possible. However, taxpayers might not incur a penalty if they owe less than $1,000 after subtracting their withholdings and credits. They might also avoid the penalty if they paid 90 percent or more of the tax for this year or 100 percent of the tax shown on their return for the previous year — whichever is less.  

If a taxpayer’s income is not even throughout the year, they may not be responsible for paying an underpayment penalty. Or, they might lower it by annualizing their income and making unequal payments each quarter.   

Contact a Knowledgeable New York Tax Attorney

If you’re a sole proprietor, corporate owner, LLC member, or individual taxpayer, it’s critical to be aware of your federal and state tax obligations. Offering skillful representation, the legal team at Brinen & Associates assists clients with a wide variety of tax matters at both the state and federal levels. Call (212) 330-8151 or send us a message to learn more about how we can help you and your business.    


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