If you are self-employed, a business owner, or earn other types of income not subject to withholding, you need to complete an estimated tax return and make quarterly payments to the United States Treasury (IRS) and Ohio Department of Taxation. Sometimes, taxpayers, who are employees and get paid with a W-2, need to submit estimated tax payments as well. Let’s review how you determine if you need to make estimated tax payments.
Individuals, who are self-employed, business owners, or earn other types of income not subject to withholding, need to make federal estimated tax payments to the United States Treasury throughout the year. Other types of income not subject to withholding can include: interest, dividends, rents, unemployment compensation, the taxable part of Social Security benefits, and alimony. Typically, taxes are deducted from employees’ paychecks throughout the year through payroll deductions. However, if you are paid any of these types of income not subject to withholding, the IRS requires you to make payments quarterly throughout the year to the United States Treasury.
Typically, these payments are due on April 15, June 15, September 15, and January 15. Sometimes, the IRS will adjust the dates slightly to accommodate holidays and weekends. The payments are staggered, so the IRS receives payments throughout the year.
First Payment: April 15 — Income earned between January 1 - March 31
Second payment: June 15 — Income earned between April 1 - May 31
Third payment: September 15 — Income earned between June 1 - August 31
Final payment: January 15 — Income earned between September 1 - December 31
If your income stays relatively the same throughout the year, the easiest way to calculate your estimated tax payments is to complete a 1040-ES, Estimated Tax Return. However, for many taxpayers, who need to make estimated tax payments, their income fluctuates throughout the year. This means you may need to increase or decrease your quarterly payments throughout the year depending on how much income you earned for the given period before the estimated tax payment due date. For many taxpayers, it will be easier to just multiply the amount earned by their combined income and self-employment tax rates, rather than update their 1040-ES each time they receive more or less income than expected.To avoid an underpayment penalty, generally, taxpayers are required to pay at least 90 percent of their taxes throughout the year by the due date of the quarterly payment following the period the income was earned, either by having the payments withheld through payroll deductions (for employees), making quarterly estimated tax payments, or a combination of the two. Although the IRS sets specific dates that the estimated tax payments are due, taxpayers can submit them anytime throughout the year. However, if they are submitted late, an underpayment penalty may be assessed. To check the estimated tax payments due dates for this year, you can check the IRS website here.
Example. Susan, a self-employed realtor, earned $20,000 in commissions in July. Regardless, if she earns any more money selling homes throughout the year or not, the full amount of taxes owed on that $20,000 will still be due on September 15, the first estimated tax payment due date following the period when she earned the commission. If she works as an employee and expects to earn a total of $75,000 this year, her income tax rate would be 22% and her self-employment tax rate would be 15.3%. Susan could calculate her estimated tax payment on the $20,000 by adding her tax rates (22% income tax rate + 15.3% self-employment tax rate = 37.3% total federal tax rate) and multiplying that amount by the $20,000 commission ($20,000 x 37.3% = $7,460). Using this method, Susan would pay $7,460 to the IRS on or before September 15.
Although this is a straightforward way to calculate estimated tax payments, it is important to note, it does not include deductions and credits and may result in an overpayment to the IRS. If you paid more than required, then when you complete your tax return for the year, it will be refunded to you. To get an accurate amount of the payment that needs to be submitted, you would need to complete a 1040-ES. And, if your income fluctuates unexpectedly, you would need to update your 1040-ES each quarter to determine the payment due.
Another easier way for taxpayers to make estimated tax payments when they earn most of their income as an employee at their primary job and only earn a small amount from a side job is to increase the amount of their withholding from their paychecks. If a taxpayer elects to increase their withholding, they would just multiply the self-employment income by their combined income and self-employment tax rate and divide that by the amount of pay periods, which would give them the additional amount they need to have withheld each pay period.
Example. Jacob works as an electrician for XYZ Electrical. Throughout the year, he does a few odd jobs and earns another $2,000 in self-employment income. To adjust for the self-employment income, Jacob could make estimated tax payments throughout the year, make one payment on the first payment due date, April 15, to cover the entire amount of $2,000, or he could just increase his withholding on his W-4 at XYZ Electrical to account for the extra income. Jacob has a combined tax rate of 39.3% (24% income tax rate + 15.3% self-employment tax rate). Jacob gets paid weekly, so he would need to have an additional $15 withheld from his paycheck, calculated as ($2,000 self-employed income x 39.3% combined income and self-employed tax rate = $786) divided by 52 weeks.
Unfortunately, this does not work for every situation. If Jacob was to earn the entire $2,000 in January instead of throughout the year, the full payment of $786 would be due on April 15 (the due date for money earned between January 1 - March 31). If he continued making the payments throughout the year, he would still owe an underpayment penalty because the full amount was not paid when due on April 15. Also, calculating the payment this way does not include deductions, expenses, and credits.
If you earn income not subject to withholding while living in Ohio or from Ohio resources, you may need to make estimated tax payments to the Ohio Department of Taxation. The Ohio Department of Taxation has an estimated tax payment system similar to the IRS with payments due around April 15, June 15, September 15, and January 15 as well. Also, just like the IRS, Ohio Department of Taxation may change the due dates slightly to accommodate for holidays and weekends.
One of the significant difference is Ohio only requires estimated tax payments to be made if you owe more than $500. However, in Ohio, you may owe estimated tax payments for both state income and school district taxes. Ohio Department of Taxation has additional information on its website including how to make payments electronically and which tax vouchers to use, which you can find here.
If you are self-employed, a business owner, or earn other types of income not subject to withholding, you need to complete an estimated tax return and make quarterly payments to the United States Treasury (IRS) and Ohio Department of Taxation. If you owe more than $500 in Ohio state income taxes or do not pay at least 90% of your federal income taxes, you need to make estimated tax payments to avoid underpayment penalties from the IRS and Ohio Department of Taxation respectfully.
There are several ways to calculate estimated tax payments, including submitting a percentage of income earned or completing an estimated tax return. If your money fluctuates throughout the year, you may need to re-evaluate how much you need to pay each time a quarterly estimated tax payment is due.
Estimated tax payments are due four times a year with the first payment due on April 15. The additional payments are due on June 15, September 15, and January 15. Sometimes, the dates will vary slightly depending on if the day falls on a weekend or holiday.
Completing an estimated tax return can be very confusing. The tax professionals at Gudorf Tax Group can help you understand your responsibilities to make estimated tax payments and the best way to calculate your quarterly payments, so you can avoid underpayment penalties. If you think you need to make estimated tax payments for federal or Ohio state taxes, schedule an appointment now.