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The Federal and state income tax systems are structured on a “pay-as-you-go” basis. This means that everyone is expected to have deposited one-fourth of their ESTIMATED annual tax liability each and every quarter. This can be accomplished by at least two different methods 1) payroll deductions on your behalf by an employer, or 2) making quarterly “Estimated Tax Deposits”. You can also use any combination of these two methods as long as the end result is achieved. You can also use the “Electronic Federal Tax Payment System”, which is both free and accurate – Welcome to EFTPS online
To permit you to continuously calculate and update your annual projected tax liability for the year, throughout the year, you can use the soft copy of your last filed-and-accepted tax returns to perform the calculations for you – 1) open the filed-and-accepted tax return file, 2) save it as a new and different file name, 3) enter the financial data for the current tax year, 4) divide the annual “tax liability” by four, 5) save the file for future reference.
If you do not meet the Federal guidelines, there could be interest and penalties. However, you will need to complete Federal tax form 2210 to make this determination ( 2020 Form 2210 (irs.gov) ) IF your monthly and quarterly income was not relatively even throughout the year (i.e. you received a large salary bonus, you were promoted and also received a salary increase, you sold investments, or you received your “Required Minimum Distribution” (RMD), etc) you can use the same form to “annualize” your estimated income for the current tax year.
The IRS does have “Safe Harbor Rules” –
” The estimated safe harbor rule has three parts:
- If you expect to owe less than $1,000 after subtracting your withholding, you’re safe.
- If you pay 100% of your tax liability for the previous year via estimated quarterly tax payments, you’re safe. …
- If you pay within 90% of your actual liability for the current year, you’re safe.”
Issue Number: Tax Tip 2021-81
Here’s how taxpayers can pay the right amount of tax throughout the year
Federal taxes are pay-as-you-go. This means that people need to pay most of their tax during the year, as they earn income. This can be done either through withholding or estimated tax payments.
If the amount of income tax withheld from a taxpayer’s salary or pension is not enough, or they receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, they may need to make estimated tax payments. Self-employed taxpayers may also need to make estimated tax payments.
Adjust 2021 withholding
All taxpayers should review their federal withholding each year to make sure they’re not having too little or too much tax withheld.
Employees, retirees and self-employed individuals can use the IRS Tax Withholding Estimator to help decide if they should make a change to their withholding. This online tool guides users, step-by-step through the process of checking their withholding, and provides withholding recommendations to help aim for their desired refund amount when they file next year. Taxpayers can check with their employer to update their withholding or submit a new Form W-4, Employee’s Withholding Certificate.
Make 2021 estimated tax payments
Estimated payments are another way for taxpayers to pay what they owe in separate quarterly payments. For tax year 2021, remaining quarterly estimated tax payments are due from individual taxpayers on June 15 and September 15, 2021, and January 15, 2022. The fastest and easiest way to make estimated tax payments is electronically using Direct Pay or Electronic Federal Tax Payment System. Taxpayers can visit IRS.gov for other payment options.
More information:
Pay as You Go, So You Won’t Owe
Estimated Taxes
Form W-4S, Request for Federal Income Tax Withholding from Sick Pay
Form W-4V, Voluntary Withholding Request
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