Q: Tax Playa, I have some side business income and rental income. Do I need to pay estimated tax payments every quarter?
Terrence, Arlington VA
A: Most people get their taxes paid by the end of the year through payroll withholding. Some people don't have a payroll, though (retirees with investment income, landlords, the self-employed, etc.) For them, taxes must be paid every quarter or penalties and interest will follow...
For more information on this, see IRS Publication 505, Tax Withholding and Estimated Tax.
You must pay estimated income tax if you expect to owe more than $1000, after subtracting out withholding and credits. Also, you must expect your withholding and credits to be less than the smaller of the two figures below:
- 90% of current-year tax
- 100% of prior-year tax (110% for <$150,000 AGI households)
You don't have to pay estimated income tax if you expect to withhold enough through payroll or other deductions, or you had no income tax liability for the prior (full) year.
One useful trick is for married taxpayers to over-withhold taxes on the spouse with a payroll in order to pay the taxes of the non-payrolled spouse. This happens all the time if one spouse is a small business owner and the other is holding down a job.
Estimated tax is paid quarterly. The taxpayer should divide his estimated tax liability by four and make payments on time. Alternatively, a taxpayer getting an unexpected glut of income should calculate tax and make payments over whatever due dates for estimated payments he has left.
Payment dates for estimated income tax are:
- First Quarter: April 15
- Second Quarter: June 15
- Third Quarter: September 15
- Fourth Quarter: January 15 of the next calendar year
A couple of caveats on the dates:
- Payroll withholding, strangely, has slightly different dates
- Corporate withholding dates are the same except for the fourth quarter, which is December 31
If you don't pay up in a timely manner, you may get hit with interest and penalties. It's usually in the 7-8% range, which is prohibitive. The rate is pegged to discourage arbitrage by taxpayers. Don't try to figure the penalty yourself--let software or the IRS figure it for you.