First time I’ve ever filed estimate-tax payments myself. AIUI, these are supposed to be done quarterly. So if it’s $40,000 in taxes for the year, it would be four payments of $10,000 apiece.
If I have a pretty good idea of what my income for the year is going to be, though, is there any IRS rule that would prohibit me from just loading the $40,000 all into one single payment and getting it all out of the way at once, instead of 4x a year?
You can give them as much money as you want. Any excess will be a credit toward your future taxes. I don’t recall all the rules involved, but you can eventually get back any excess as a tax refund if you want it.
I don’t know if this will eliminate any paperwork for you though. If you need to file quarterly now you may still have to file the forms with each quarter.
The basic idea is “pay as you go”, where each quarterly payment covers roughly that quarter’s taxable income.
You can pay them early if you want. IOW, all $40K on Apr 15 for next year’s first 1040ES payment.
You cannot pay them late if you want. IOW all $40K on Apr 15th along with your return for last year’s taxes. Doing that will incur both penalties for late payment and interest on the unpaid balance over time on top of the total tax owed.
There are a series of forms and schedules 2210 that can be used to compute all this. If your income is pretty evenly distributed throughout the year, simply dividing the total by 4 is an approved solution and is probably close enough to not be worth getting any fancier. OTOH, if your income jumps around a lot from quarter to quarter, you may benefit from the additional hassle of computing everything by quarter and paying estimated tax per those quarterly computations.
The big benefit to you comes in if a big chunk of your income reliably comes in the 3rd or especially 4th quarter of the year. If so, by doing the 2210 calcs (confusingly called “annualizing your income”) and paying quarterly per those calculations you can hold on to a lot more of your money until the very last day versus paying extra money extra early unnecessarily.
Bottom line: Paying them as late as possible, but no later, is just good business. They make it easy enough to do that if your personal situation warrants.
The IRS says
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you don’t pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.
If you pay all four payments at the time that the first one is due, then none of them are late, so there should be no penalty. You should probably check with your accountant to confirm this though.
Do you have to file quarterly, or just make estimated payments? I file annually, but I have to make estimated state tax payments to NJ (since all my income is reported in NY, but I live in NJ). At least at the state level, there’s no issue with paying all the estimates at once.
If you have to file quarterly, I have no idea what the answer is.
You won’t get any interest for paying estimated tax early, so you are correct that you should definitely pay as late as reasonably possible.
But as a matter of interest (I crack myself up) they actually pay you a very competitive interest rate for refunds due where there’s a significant payment delay past the filing deadline. I’m not exactly sure what the rules are, but it even applies if you make a mistake on your return and refile (say) two years later requesting a refund. If the amended return is correct, they issue your refund plus two years’ interest. I think maybe they have to pay the same interest rate that they charge for unpaid tax, because the couple of times it has happened to me it seems generous. You then have to pay tax on the interest they just paid you, so they get you in the end…
We pay estimated taxes in order to avoid a penalty the following April. I’ve never understood why the IRS gets to charge you a penalty when you wait until April to pay, since it’s the fucking legal cutoff date.
Because the legal payments dates are separate for each quarter. The date April 15 is for reconciling the entire year.
If you’re working, and your withholding is close enough (with 10%?), then you’re OK because you’re paying all along. If you’re retired, I guess you have to make quarterly payments on income?
You don’t need to be retired. If you have investment income or any other income that’s not subject to withholding, you have to pony up.
But they are pretty reasonable about it - the rules are called “safe harbor”. Basically so long as you are paying the lesser of what was due last year (plus 10% if high income) and 90% of what’s due this year there’s no penalty. And if you get it wrong you’re only paying penalties on the difference between what you actually pay and the safe harbor amount.
Occasionally I’ve had some nominal amount of estimated tax and paid it all at once. I’ve never checked that it was OK, but they’ve certainly never come back to me to tell me to change what I’m doing,
Also if you are working and have withholding as well as unearned income, you can change your W4 (I think it is) so they withhold more. If they withhold enough you don’t even need to file estimates. Another nice thing is if you figure late in the year that you’ve not paid sufficient estimated tax, you can have a large withholding done. You’re allowed to “pretend” that withholding was done evenly through the year so withholding a lot at year end might sage you interest or a penalty for too low an estimate.
Or rather you can, but then as you say…
I did this regularly when I was a grad student and was barely paying any taxes, but also not having any withdrawn from my stipend. The interest ended up being pretty minimal and I don’t recall being charged any additional penalty (maybe the amount I owed was too low). It call got figured out as part of the 1090 form so I found it just easier than trying to navigate the payment structure.
Nope, go right ahead. Comes out the same. Just do it with the first payment. Unless this is your first time filing the estimated tax payments, in which case the penalties can be waived in many cases.
Right.
The latter, if I remember correctly – I was self-employed from 2015-17, and had to make the estimated payments each quarter, but I was still only actually filing an income tax return once a year.
Note at the estimated tax payment site there is the option of setting up a series of up to 4 dates on which money will be withdrawn. So you could put your total estimated money in a high interest savings account and have IRS withdraw money 4 times a year–and then you get maybe a few hundred dollars in interest on the money in the account until it is withdrawn–interest you wouldn’t be getting if you paid the money now all at once.
I got nailed with a late filing penalty one year. What had happened was that I had received several sizable dividend payments in December, which unbeknownst to me meant that my income for the last quarter of the year was high enough that I should have made an estimated tax payment by January 15. I didn’t find this out until I filed my regular taxes, and then received a notice from the IRS about the penalty. Later, I received quarterly tax payment forms (this was back when the IRS actually mailed forms to you every year. Since I had restructured my dividend payments so they would be used to purchase additional stock monthly instead of being paid to me in a lump sum in December, I no longer needed to make estimated payments. The IRS never tried to bill me for estimated payments and didn’t send me any more forms the next year,
I did not know this, and I pay online using bank withdrawals. I’ll look for this when I pay this month (provided I will be able to log in, but that’s probably better discussed in the pit).
Oh, and I wish they would either move the April payment to March, or shift the other payments so there is always three months between payments. This June payment just annoys the hell out of me.
In the OP’s example, the first estimated tax payment is due on April 15th. Ordinarily the tax payer would pay 10,000 in April, June, September and January. Instead the taxpayer sends $40,000 to the IRS in April. How much interest is our taxpayer giving up through April of the following year?
The Vanguard Admiral Treasury Money Market Fund currently pays 5.07%. At that rate our well-heeled taxpayer would be giving up $676 in interest according to my spreadsheet. Maybe a little less if you pay 5 or 10 days in advance of the due date, but still. That’s interest on $30,000 for 2 months, interest on $20,000 for 3 months and interest on $10,000 for 4 months.
(I hope I did my math properly.)
Ok, now say our taxpayer paid $10,000 in April and $30,000 in June. They are giving up interest on June and September payments (20,000 and 10,000). How much are they giving up? $423 by my calculation.
My mother says that she sent New Jersey her estimate for the year a few months ago and they never cashed her check. And she says that she sent it a second time and they still did not cash it.
I guess I need to look into what she is sending with the checks.
State tax agencies are typically less efficient than the IRS. They can take 2-3 months to cash a check, IIRC. Possibly related, some of them require electronic payment for higher income tax payers.