How to Make Estimated Tax Payments [Avoid IRS Penalties]

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So many single moms – especially newly divorced single moms – end up in tax trouble. It’s one of the things no one really tells you about until it’s too late and you’re already on the hook for IRS penalties and interest on taxes you didn’t even realize you owed.

So if you:

Started a business
Got unemployment
Work from home as a freelancer
Have any 1099-MISC income
Have investment income
Take money out of a retirement account…

You could get a nasty surprise at tax time, unless you do something proactive to prevent it.

The solution is simple: Make estimated tax payments during the year.

This article first appeared on Single Mom CPA and is republished here with permission.

What kind of income would be on the 1099-MISC?
1099-MISC is an income reporting form that gets sent by the payer to the person who got paid (at least $600) and to the IRS. It includes “other” – miscellaneous – types of income, such as royalties, prizes, and non-employee professional services.

What are Estimated Tax Payments?

When you have a regular job with a regular paycheck, they take out taxes – a lot of taxes, including:

Federal income tax
Social Security tax
Medicare tax

That’s because we have a “pay as you go” tax system in the U.S., and it’s why we fill out tax returns every year (because most people overpay).

But if your income comes from other taxable sources (like alimony or freelancing), no one is managing those taxes for you, and they’re going unpaid. That makes the IRS mad, and they’ll hit you with interest and penalties on the taxes at the end of the year unless you make estimated tax payments.

Every quarter, you’ll send payment into the IRS for roughly 25% of your expected year-end tax bill (we’ll talk about how to figure out how much to pay in just a minute).

If you blow off those quarterly payments or don’t pay enough, you’ll end up with a huge tax bill in April that’s made even bigger with interest and penalties. Those extra fees kick in if you’re even one day late. So set a reminder, put it on the calendar, whatever you have to do to make sure those quarterly estimated tax payments get sent in on time.

Estimated Tax Payment Dates

COVID UPDATE

THE FIRST TWO FEDERAL ESTIMATED TAX PAYMENTS FOR 2020 WERE DUE ON JULY 15, 2020.

Payment 1	April 15
Payment 2	June 15
Payment 3	September 15
Payment 4	January 15

When the 15^th falls on a weekend or holiday, your estimated tax payment is due on the next business day.

Important: If you are late with your estimated tax payment, don’t wait until the next payment date. Send your late payment as soon as possible to minimize interest charges. The longer you wait, the more it will cost you.

Why a good estimate matters

The IRS is fussy about estimated tax payments, which are required if you’ll have a tax bill of at least $1,000 for the tax year. Not only do they insist you pay on time, but they also expect your payment to be “enough.” So even if you make an on-time payment, if they think you underpaid, you could still get hit with penalties and interest (but just on the underpayment amount).

That’s why it’s so important to come up with a good estimate. You don’t want to overpay and give the IRS more of your money than absolutely necessary. But you also don’t want to underpay and give them an excuse to pile more on to your tax bill.

To come up with a good estimate, you first have to figure out how much taxable income you expect to get for the whole year. Add up all of your expected income from every possible source. Make sure to include any regular job income (that already has tax taken out) when you’re figuring this out because it might change your tax rate.

Don’t include any money you have coming in that’s NOT taxable, like money from loans, child support, or garage sales (or eBay or Craigslist as long as you didn’t sell anything for more than you originally paid for it).

Once you have all that information together, head over to the IRS Form 1040-ES, which will walk you through the math.

If this all feels like too much, get help! You can ask me any questions in the comments section below, or contact me privately.

It’s easy to avoid underpayment penalties

Trying to figure out the right amount of tax to pay can be nerve-wracking, and it feels even worse if you’ve never done it before or have had a major change in income. And the thought of getting hit with penalties can bring on anxiety… especially for single moms who don’t have the extra money to spare.

But there’s a very easy way to avoid underpayment penalties: Pay at least the amount of taxes you paid last year.* That way, even if you do end up owing – even if you owe a lot – the IRS won’t charge the penalty. (The IRS calls this the “safe harbor” requirement.”)

*If your AGI (adjusted gross income) was more than $150,000 last year, you have to pay 110% of last year’s total tax bill to avoid the underpayment penalty.

If your total taxable income will be substantially lower this year, and you know your tax bill won’t even come close to last year’s, aim to pay at least 90% of your current year’s tax bill. If you hit that 90% mark and owe less than last year, the IRS won’t charge a penalty.

The Safe Harbor Summary
Avoid estimated tax underpayment penalties by paying:
100% of last year’s tax
110% of last year’s tax if you made more than $150,000
90% of this year’s tax bill

Filling out the forms

If you use tax software, it will do all of the math and fill out Form 1040-ES for you.

When you figure out and file your estimated tax payments, you’ll use IRS Form 1040-ES (yes, the same one again). The form comes with an instruction booklet that covers absolutely everything about how to do the calculations and where to send your check/how to pay online. You can also try their online worksheet to help with some of the math.

If the thought of reading through 8 pages of instructions makes your brain want to shut down, don’t worry. Here’s what you really need to know to do the math part. (And after you’ve done this once or twice, it’ll take no time at all…I promise.)

If you get a regular paycheck: To avoid the hassle of filing estimated taxes – and never worry about being late – you can increase your withholding taxes to cover the amount you’ll owe. All you have to do is fill out a new Form W-4 with your employer, and do quarterly check-ins to make sure you’re still on track to meet the safe harbor requirements for the year.

Step 1: Figure out your expected self-employment income and self-employment taxes if you freelance, consult, or have your own business.

Step 2. Add up all of the taxable income you expect to bring in this year.

Step 3. Add up the things that will reduce your AGI, which include:

Half of self-employment taxes
Traditional IRA contributions
Self-employed retirement plan contributions
Self-employed health insurance deduction
Student loan interest deduction
Educator expenses

Step 4. Subtract Step 3 from Step 2 to get your expected AGI.

Step 5. Subtract either the standard deduction or your itemized deduction from the AGI you calculated in Step 4. The standard deduction for 2019 is $18,650 if you file as Head of Household or $12,400 if you file as Single.

Step 5. Use the IRS tax rate schedules to figure out your estimated tax bill. You’ll find those tax rates in the instructions for Form 1040-ES. Use Schedule X if you’re filing Single or Schedule Z if you’re filing as Head of Household.

Step 6. If you will owe self-employment taxes, add them to the result you got in Step 5.

Step 7. Total up your expected tax credits, which may include (among others):

Child tax credit
Child care credit
Earned income credit
Education credits

Subtract your total expected tax credits from the estimated tax you calculated in Step 6.

The result here is your estimated taxes for the year.

Step 8. If you have already had income taxes withheld this year (like through a paycheck) or if you expect to have income taxes withheld going forward, subtract the total income tax withholding you expect from the result you got in Step 7.

Step 9. If the result you got in Step 8 is greater than $1,000, you’ll have to make estimated tax payments. Divide the amount from Step 8 by 4 to figure out the amount to send in each quarter.

If this all feels like too much, get help! You can ask me any questions in the comments section below, or contact me privately.

Don’t forget state taxes!

If you need to pay estimated federal income taxes, chances are you’ll need to pay estimated state income taxes as well – though every state has its own rules and requirements. Check with your state income tax office to find out the rules that apply to your situation.

Before her son was born, Michele Cagan worked as a high-powered CPA for one of the biggest accounting firms in the world. Now, as a single mom, life centers around loving and supporting her son while also striving to write accessible financial books and articles for other single moms hoping to secure their financial freedom. Find Michele at Single Mom CPA™ and MicheleCaganCPA.