If you’re required to make estimated tax payments to the IRS, taxes are due four times per year. If you missed a quarterly tax payment, the IRS will charge you with an underpayment penalty for not paying enough or not paying on time (even if you’re owed a tax refund).
The penalty charged is not a static number for everyone, based on the amount underpaid and the period it was not paid. The IRS will typically charge a failure-to-pay penalty of 0.5% of the unpaid amount every month it is unpaid, up to a maximum of 25%. In addition, you’ll also be charge interest based on the IRS’ interest rates, which are determined every quarter.
The way to avoid paying the underpayment penalty is to either pay 90% of your expected tax liability for the current tax year with timely estimated quarterly payments, or pay at least 100% of the amount you owed on last year’s federal tax return. If your adjusted gross income is over $150,000, you’ll have to pay 110% of the amount owed last year.
Who needs to pay estimated tax payments?
If you’re wondering if you need to make estimated tax payments, this guide takes you through a detailed explanation on who’s required to pay, and what types of income must be reported.
Quarterly taxes are most commonly paid by people who earn income that isn’t eligible for withholding. With a W-2 income, your employer withholds your taxes and pays the IRS on your behalf. But if you’re self-employed, run your own business, or earn money through investments, you’re required to pay your taxes as you earn income directly to the IRS.
You may have to pay estimated tax payments if…
- You expect to owe at least $1,000 in taxes, after subtracting your withholding and tax credits, when you file your return.
- You expect your withholding and tax credits to be less than the smaller of: 90% of the tax to be shown on your tax return, or 100% (110% if your 2023 AGI is over $150,000) of the tax shown on your 2022 tax return (must cover all 12 months of the 2022 tax year).
- You earn a W-2 income but not enough taxes are being withheld by your employer.
- You run a business or are part of a corporation, partnership, or LLC.
- You generated capital gains or received dividend income on your investments.
- You generated rental income from your properties.
- You received royalty payments.
Are quarterly tax payments mandatory?
Yes, if you’re eligible for quarterly tax payments, then you must pay quarterly taxes when they’re due. If you don’t, you could be hit with a penalty from the IRS even if you’re going to be owed a refund when you file your taxes.
When do I need to pay quarterly taxes?
Estimated taxes are due four times per year, usually on April 15, June 15, September 15, and January 15. If any of the days fall on a weekend or holiday, they get moved to the following weekday.
For 2023, the due dates are:
- First payment deadline: April 18, 2023
- Second payment deadline: June 15, 2023
- Third payment deadline: September 15, 2023
- Fourth payment deadline: January 16, 2024
If you run a business and don’t use the calendar year as your fiscal year, then your due dates are:
- First payment deadline: The 15th day of the 4th month of your fiscal year.
- Second payment deadline: The 15th day of the 6th month of your fiscal year.
- Third payment deadline: The 15th day of the 9th month of your fiscal year.
- Fourth payment deadline: The 15th day of the 1st month after the end of your fiscal year.
What is the penalty for not paying quarterly estimated tax payments?
The IRS charges an underpayment penalty to anyone who is late to pay their estimated taxes, or anyone who doesn’t pay enough. The penalty is not a static percentage or dollar amount, but based on the total amount unpaid and the period the taxes weren’t paid. The more you owe, and the longer you don’t pay, the more you’ll owe in penalties and interest you’ll owe.
If you receive an underpayment penalty, the IRS will send you a notice that you owe the Underpayment of Estimated Tax by Individuals Penalty.
You’ll charged with a failure to pay penalty of 0.5% of your amount owed each month that you fail to pay, up to a maximum of 25% of your liability.
The IRS will also charge you interest
The IRS also charges you interest on the unpaid amount, using interest rates that they determine every quarter.
Here are the interest rates for 2023, depending on which quarterly payment you miss.
(Oct – Dec)
(Jul – Sep)
How to avoid the underpayment penalty
There are two ways to avoid paying the underpayment penalty:
- Pay at least 90% of your current tax year’s tax liability with timely quarterly estimated tax payments. The best way to avoid the underpayment penalty is to estimate your taxes owed by a tax professional, using software, or using Form 1040-ES to estimate your taxes owed to ensure you pay at least 90% of your taxes owed for the current year.
- Pay at least the equivalent amount of 100% of the taxes owed from last year’s federal tax return. The IRS has a safe harbor rule for estimated tax payments as well. Even if your income grew this year, you can generally avoid the penalty by paying 100% of the taxes you owed on last year’s federal tax return. If your adjusted gross income is over $150,000, then you’re required to pay 110% of the taxes owed from last year’s return.
Penalty exceptions, waivers, and reductions
You are not required to pay estimated taxes if either of the following apply:
- If you had zero tax liability for the previous year, were a US citizen or resident alien for the entire year, and your previous tax year covered a 12 month period.
- If the total tax liability for the current year is less than $1,000.
Waived and reduced penalties
If you received an underpayment penalty, the penalty can be waived or reduced for the following reasons:
- You retired after reaching age 62 or became disabled either in the current or previous tax year, and your underpayment was due to reasonable cause (not willful neglect).
- The underpayment was due to a casualty, disaster, or other unusual circumstance like serious illness or injury, a family member’s death, or similar situations beyond your control.
If you receive an underpayment penalty, the IRS will send you a notice that you owe the Underpayment of Estimated Tax by Individuals Penalty. If you think you qualify for a waiver or reduction in the underpayment penalty, you’ll have to respond to the notice with a written explanation, signed under penalty of perjury, to the address listed at the top of your notice.
If you can’t pay the full amount, set up a payment plan
If you’re unable to pay the full amount of your taxes on time, the IRS advises that you pay what you can and apply for a payment plan, which may reduce future penalties.
As an individual, you can qualify for either a long-term payment plan (monthly payments) or a short-term payment plan (paying in 180 days or less).
- Long-term payment plan: if you owe $50,000 or less in combined tax, penalties, and interest, and filed all required returns.
- Short-term payment plan: if you owe less than $100,000 in combined tax, penalties, and interest.
Note: Long-term payment plans have a $31 setup fee when set up with automatic withdrawals from your bank, or a $130 setup fee for non-direct debit payments.