The IRS reminds individuals that September 15, 2023 is the deadline for making their third quarter 2023 federal estimated tax payments.
Individuals who have significant portions of their income not subject to federal income tax withholding are advised to make federal estimated tax payments. These individuals include self-employed individuals, investors with substantial interest, dividend and capital gain income, and retirees (including federal annuitants) who have chosen no federal income tax withholding, or limited amount of federal income tax withholding, from their monthly retirement payments.
The United States has a “pay as-you-go” tax system. This means that U.S. citizens have to pay their tax liability throughout the calendar year instead of in one amount when they file their federal income tax return in the spring following the close of the calendar year.
IRS rules state that individuals must pay (through withholding) 90 percent of their anticipated tax liability for the year. If an individual has withheld an insufficient amount of federal income taxes, then the individual could be subject to an under-withholding penalty when the individual files his or her annual federal income tax return.
Who Should Pay Quarterly Estimated Taxes?
Those individuals who have significant income that is not subject to federal income tax withholding will probably need to make quarterly estimated tax payments during 2023. In particular, if they expect to owe $1,000 or more after deducting any tax credits when they file their 2023 federal income tax returns in spring 2024.
For federal employees, the income they receive which is not subject to federal income tax withholding includes interest, dividend and capital gain income, net rental income, prizes and royalties.
For federal retirees, the income they receive which is not subject to federal income tax withholding includes Social Security, interest, dividend and capital gain income, net rental income, and CSRS and FERS annuities in which the annuitant requests a minimum or no federal income tax withheld from their monthly annuity.
Estimated Tax Payment Due Dates
Individuals who are required to make federal estimated tax payments during 2023 have the option of paying the entire amount due by April 18, 2023, or in four equal amounts by the dates shown in the following table.
The payment due dates represent the 15th day (or if the 15th day of the month falls on a Saturday, Sunday, or a legal holiday, the next business day of the month) following the end of the “quarter.” The IRS divides the year into four “quarters” as shown in the following table:
As explained below, the IRS’ division of the calendar year is important with respect to avoiding an under-withholding penalty through what the IRS calls a “safe harbor” payment provision.
How to Calculate Estimated Tax Payments
In order for an individual to figure their estimated tax, they must know certain things such as their adjusted gross income (AGI), taxable income, deductions, such as the standard deduction or itemized deductions, and taxes withheld from salary and pension income. IRS Form 1040ES (downloadable here) contains a worksheet that allows individuals to figure their 2023 estimated tax payments. The worksheet is reproduced below.
Individuals may have to pay a penalty if they underpaid their taxes during the year. This underpayment of taxes can be a result of insufficient federal income tax withholding from salary and pensions and no or limited federal estimated tax payments.
There is no penalty for individuals if they meet any of these conditions:
• When they file their 2023 federal income tax return, they owe less than $1,000; or
• They fulfill a “safe harbor” option in they pay the smaller of the following two amounts throughout 2023:
(1) A minimum of 90 percent of their 2023 tax liability during each of the four periods listed in the table above; or
(2) 100 percent of the tax liability of their 2022 federal tax liability in each of the four periods during 2022 – 110 percent of the 2022 tax liability if their 2022 AGI exceeded $150,000 – during each of the four periods during 2023.
How to Pay Estimated Taxes
Paying online is convenient and ensures that the payments are received by the IRS on time. To get more information for paying taxes online, go to https://www.irs.gov/payment.
Online payments can be made by any of the following methods:
• Online account. An individual can make tax payments including balance due payments, estimated tax payments or other types. An individual can also see nis or her payment history.
• IRS Direct Pay Online transfers directly from checking or savings accounts at no cost.
• Pay by Card. Estimated tax payments can be made by debit or credit card. A convenience fee is charged by service providers.
• Electronic Fund Withdrawal (EPW) is an integrated e-file/e-pay option when filing federal income taxes electronically using tax preparation software.
• Electronic Federal Tax Payment System (EFTPS). To get more information about EFTPS or to enroll in EFTPS individuals should go to https://www.EFTPS.gov or call 1-800-555-4477.
Employees and retirees who have questions about estimated tax payments (both federal and state if they live in a state that has a state income tax), are advised to talk to a tax professional. This is especially the case if an employee or retiree incurred a significant taxable liability resulting from a certain financial action. For example, selling a bond, stock, mutual fund or an ETF at a gain, or converting a traditional IRA to a Roth IRA. In both incidences, no federal income taxes were withheld. Third quarter 2023 estimated tax payments are due September 15, 2023.
Federal estimated tax payments can be mailed to the IRS. Information about mailing estimated tax payments can be found in IRS Form 1040ES (downloadable here).
Those individuals who have to make state estimated tax payments for 2023 are advised to check with their state tax and revenue departments with respect to the options for making their state estimated tax payments.