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How To Avoid A Penalty For 4th Quarter Estimated Tax Payments?
How To Avoid A Penalty For 4th Quarter Estimated Tax Payments?
Tax deadlines can provoke a lot of anxiety, and for good reason. Not paying your self-employment taxes on time could result in the IRS slapping you with a penalty. Fortunately, there are ways you can avoid this outcome.
As a W-2 employee, your taxes are withheld from your paycheck, making taxes much more manageable. Self-employed taxpayers are responsible for making quarterly estimated tax payments four times a year. That’s a lot of tax deadlines to keep track of. If you miss the deadline for the 4th quarter payment, it’s possible to get a penalty for estimated taxes, and you’ll need to act fast.
This guide will answer questions like how to extend tax filing, what is the penalty for not paying estimated taxes, how to avoid a penalty for not paying estimated taxes, and how to avoid underpayment of estimated tax with unstable income.
Table of contents
Key takeaways:...Read more
What are estimated taxes?...Read more
Who pays estimated taxes?...Read more
When are estimated tax payments due in 2024?...Read more
How to pay quarterly taxes?...Read more
How to avoid the penalty for not paying estimated taxes?...Read more
How to waive an underpayment tax penalty?...Read more
Making the full payment at once...Read more
How to calculate quarterly taxes?...Read more
What is the penalty for not paying estimated taxes?...Read more
How to extend tax filing?...Read more
Is there a penalty for filing taxes late?...Read more
What is the safe harbor rule for avoiding the underpayment of estimated tax penalty?...Read more
How to avoid an underpayment tax penalty if my income is unstable?...Read more
Does filling a tax extension avoid an underpayment penalty?...Read more
What is the tax filing deadline for 2024?...Read more
Key takeaways:
- Estimated taxes need to be paid for any income not subject to withholding.
- If you don’t adhere to the IRS’s estimated tax rules, you will be hit with an underpayment penalty.
- If you missed the deadline for the 4th quarter payment, it’s still possible to avoid a penalty on estimated taxes.
What are estimated taxes?
Quarterly or estimated taxes are paid by anyone who doesn’t have their federal income taxes withheld from their paycheck. The IRS requires that anyone who has self-employed income or any other income not subject to withholding must pay taxes quarterly, or four times a year. It’s an estimate of the taxes you’ll end up owing for that quarter, which you'll know at the end of the year when you know what your income was for the entire year.
Who pays estimated taxes?
Taxes are an inescapable part of life, and every American earning an income is required to report their income to the IRS on Form 1040, whether you're a self-employed individual or a W-2 employee. But not everyone needs to pay estimated taxes. According to the IRS, estimated taxes are required to be paid by:
- Gig workers
- Self-employed individuals
- Small business owners
- Freelancers
- 1099 workers
- Independent contractors
When are estimated tax payments due in 2024?
When it comes to tax filing for estimated taxes, there are a few important dates to keep in mind.
If you file your income tax return by Jan 31, 2025 and submit your entire owed balance, you won’t need to pay the January 15 payment and avoid the underpayment tax penalty.
How to pay quarterly taxes?
Tax forms can be lengthy and time-consuming. Traditionally, the easiest way to make an estimated tax payment was to submit a paper copy in the mail to the IRS by the tax filing deadline 2024. Instead of opting for snail mail, you can now pay quarterly taxes online through the IRS website. You also get an instant confirmation that your payment was accepted so you don't have to worry about any surprise penalty for underpayment of estimated tax.
How to avoid the penalty for not paying estimated taxes?
You might end up with an estimated tax penalty from the IRS if you have a habit of underpaying your IRS estimated tax payments. You’ll owe 0.5% of your unpaid balance per month, up to 25%. As if that's not harsh enough, you’ll also accrue interest on that amount.
Don’t lose hope, though. There’s a way you can bypass the underpayment penalty altogether with the estimated safe harbor rule. You can pay 100% of your previous year’s taxes, if your adjusted gross income is less than $150,000, or 90% of your taxes for the current year. Whichever amount yields a smaller payment is the route you should take.
The safe harbor rule doesn’t guarantee you won’t need to pay more taxes. It’s best to set money aside from your income to cover federal income tax and state taxes. This way if you do end up owing more taxes, you’re prepared to pay. If you do end up with a penalty on estimated taxes, you can use a tax penalty calculator to help you total your penalties.
How to waive an underpayment tax penalty?
An underpayment penalty can be waived under certain circumstances, including:
- You’re retired, and you reached 62 years of age during the current or previous tax year.
- You became disabled during the tax year.
- The payment was missed due to a natural disaster or unusual circumstance.
- You didn’t owe any taxes for the previous year and were a US citizen during that time.
- There was a reasonable cause for missing the penalty and not for neglecting to pay.
Making the full payment at once
It would seem to make things a lot easier if you could just make the estimated tax payment to the IRS all at once. Unfortunately, the IRS doesn’t agree, and you can’t make the payment all at once. You’ll need to make estimated tax payments each quarter. If you don’t, you’re still on the hook for a penalty for estimated taxes.
How to calculate quarterly taxes?
Calculating your quarterly estimated tax payment can feel overwhelming, especially with the fear of a penalty looming over your head. There are a few ways to calculate how much you’ll owe. One place to start is by using a tax bracket calculator to see which tax bracket you belong to.
Method 1
The first option is a good choice if you have consistent self-employment income, or you’re confident in how much income you’ll earn for the year. Estimate how much you think you’ll owe for the year and send one-fourth of it to the IRS. For example, if you estimate you’ll owe $25,000 for the year from your dog walking business, you would end up paying $6,250 each quarter
Method 2
The second method is meant for those with varying incomes who aren't sure how much money they will bring in each quarter. If you work as a landscaper, for example, your income might be higher in the warmer months in comparison to the colder months, making it hard to predict how much you’ll earn.
You’ll estimate your yearly tax obligation based on your previous year's earnings. At the end of each quarter, you’ll analyze your current tax so far based on your income, tax write-offs and tax credits. A quarterly tax calculator can help with this, and the IRS has a worksheet you can use, too. Regardless of the method you use, there are a few options when it comes to making a payment to the IRS.
Once you’ve decided on your payment method, consult a CPA, like the dedicated CPA team at FlyFin, to be sure you’ve taken advantage of all the possible deductions and credits you’re eligible to receive. FlyFin’s AI guarantees you’ll never miss a tax deduction and will save more in taxes. Expert CPAs also review your returns and offer unlimited support on 1099 employee taxes all year round.
What is the penalty for not paying estimated taxes?
If you don’t pay enough in estimated taxes throughout the year, the IRS can charge you an estimated tax penalty. This penalty comes into play if you owe more than $1,000 when you file your taxes. The amount of the penalty depends on how much you should have paid and how late the payments are.
For example, let’s say you’re self-employed and should be making quarterly payments, but you miss a few or underpay. When tax time rolls around, you’ll not only owe the taxes but also a penalty for not paying estimated taxes. A common scenario is a freelancer who’s new to paying estimated taxes and doesn’t realize how much they owe throughout the year.
To avoid this, try to estimate your income and make those quarterly payments on time. If you’re unsure, you can always consult a tax professional or use online tax tools to help calculate and stay on top of your payments. Taking these steps can help you avoid the frustration of a penalty for underpayment of estimated tax.
How to extend tax filing?
If you’re not ready to file your taxes by the April deadline, you can request more time by submitting Form 4868. This gives you an extra six months, moving the tax filing deadline 2024 to October 15. However, it’s important to know that while filing a tax extension gives you more time to file, it doesn’t give you more time to pay.
If you owe taxes, you still have to pay by the April deadline, or you could face both an estimated tax penalty and a penalty for filing taxes late. For example, if you’re a small business owner and feel overwhelmed with all the paperwork, filing an extension can take some of the pressure off. But you’ll still need to estimate and pay what you owe to avoid penalties. If this sounds like your situation, consider using tax software or get help filing late tax returns to make sure you’re meeting deadlines and staying on top of what you owe.
Is there a penalty for filing taxes late?
If you file after the deadline without an extension, you’ll face a penalty for filing taxes late. The IRS typically charges 5% of your unpaid taxes for each month you’re late, up to 25%. For example, if you owe $2,000 in taxes and you file five months late, you could owe an extra $500 in penalties.
If you didn’t pay enough in estimated taxes throughout the year, you might also face a penalty for underpayment of estimated tax. Imagine you’re someone who didn’t realize you owed taxes, so you missed the deadline altogether. By the time you file, the penalties can really add up, not just for filing late but also for not paying enough during the year.
To avoid this situation, file on time, even if you can’t pay everything at once. The IRS offers payment plans, and it’s always better to pay what you can rather than let the penalty for estimated taxes build up.
What is the safe harbor rule for avoiding the underpayment of estimated tax penalty?
The safe harbor rule can help you avoid the estimated tax penalty. According to this rule, you won’t face a penalty for underpayment of estimated tax if you pay at least 90% of what you owe for the current year or 100% of what you owed last year. If your income is higher, you may need to pay 110% of what you owed last year to meet the safe harbor rule.
For example, if you’re self-employed and your taxes were $15,000 last year, you’ll need to pay at least that amount in estimated taxes this year, even if your income is different. This rule is especially helpful if your income is unpredictable, like for freelancers or small business owners.
Let’s say one year is slower, and you think you might owe less, but you still want to avoid penalties. By following the safe harbor rule, you’ll be protected from an underpayment penalty, regardless of how your income fluctuates.
How to avoid an underpayment tax penalty if my income is unstable?
If your income changes a lot from month to month, it can be tough to know how much to pay in estimated taxes. The trick to avoiding an underpayment penalty is adjusting your payments throughout the year based on how much you’re earning. If you have a slow quarter, you can pay less in taxes, but when your income jumps, you’ll need to pay more to avoid the underpayment of estimated tax penalty. You can do this with the annualized income installment method.
For example, if you’re a freelance designer and your income spikes during the holiday season but drops off in the summer, you’d pay higher estimated taxes during your busy months and less when things are slower. If you miss a payment or don’t pay enough, you could face the penalty for not paying estimated taxes. A good way to stay on top of things is to track your income and adjust your payments regularly.
Does filling a tax extension avoid an underpayment penalty?
Filing a tax extension gives you extra time to file your tax return, but it doesn’t give you extra time to pay your taxes. Even with an extension, any taxes you owe are still due by the original April deadline. If you didn’t pay enough in estimated taxes throughout the year, you might still face an estimated tax penalty or a penalty for underpayment of estimated tax.
Let’s say you’re a small business owner and you file for an extension to get more time to finish your tax paperwork. That extension will give you until October to file, but if you didn’t make your estimated payments during the year, you could still owe penalties.
On top of that, if you don’t pay your taxes by April, you might also get hit with a penalty for filing taxes late.
What is the tax filing deadline for 2024?
The tax filing deadline for 2024 is April 15, 2024. If you need more time to file your taxes, you can request an extension by filing Form 4868, which gives you until October 15 to submit your return. However, remember that an extension only gives you more time to file, not more time to pay any taxes you owe. If you don’t pay by the April deadline, you could face an underpayment tax penalty and a penalty for filing late.
For example, if you’re juggling a lot of paperwork or running a business, you might not have everything ready by April. Filing an extension would help avoid late-filing penalties, but you still need to estimate your taxes and make a payment by the original deadline to avoid extra fees. If you’ve fallen behind, it’s a good idea to get help filing late tax returns so you don’t miss any important deadlines and can avoid penalties.
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