In a News Release, the IRS has reminded taxpayers that the 2023 second quarter (Q2) estimated tax payment is due June 15. (IR 2023-111, 6/7/2023)
Pay-as-you-go taxes.
The U.S. has a pay-as-you-go tax system so taxpayers need to pay most of what they will owe in taxes during the year as they receive income. Taxpayers can comply with the pay-as-you-go rules in two ways:
1. Withholding from wages, pension or certain government payments, such as Social Security.
2. Making quarterly estimated tax payments during the year.
Note. Taxpayers who have taxes withheld from their wages, for example, may need to make estimated tax payments if they have a gig or side job that doesn’t withhold taxes.
Who should pay estimated tax?
Generally, individuals who have income that isn’t subject to tax withholding and who expect to owe tax of $1,000 or more. This includes the self-employed, partners and S corporation shareholders, retirees, and investors.
Note. Individuals who expect to receive a Form 1099-K, Payment Card and Third-Party Network Transactions, should also make estimated tax payments.
Generally, corporations must make estimated tax payments if they expect to owe tax of $500 or more when they file their return. Corporations can use Form 1120-W, Estimated Tax for Corporations, to calculate their estimated tax payments.
Note. Other business entities, such as partnerships and S corporations that pass through their tax liability to partners and shareholders may also need to make estimated tax payments if they will have entity level income.
How to make estimated tax payments.
The IRS recommends that individual taxpayers make their estimated tax payments electronically using their IRS Online Account or IRS Direct Pay. Both the Online Account and Direct Pay allow taxpayers to direct debit from a bank account, which doesn’t involve a processing fee.
Taxpayers can also make estimated tax payments using a debit card, credit card or a digital wallet. Using a payment card of a digital wallet will incur a processing fee, which is charged by the payment processor, not the IRS.
Taxpayers can find links to all these payment methods at IRS.gov/payments or on the IRS2Go app.
Both business and individual taxpayers can use the Electronic Federal Tax Payment System (EFTPS) to make estimated tax payments. Corporations must use electronic funds transfer to make their federal tax payments including, employment, excise and estimated and regular payments of corporation income taxes.
Note. EFTPS requires advance registration to use, which can take at least 10 days, and taxpayers must make their tax payments no later than one day before they are due.
Avoiding an underpayment penalty.
According to the IRS, taxpayers can avoid an underpayment penalty by making estimated payments equal to at least 90% of their tax expected 2023 tax, or at least 100% of the tax shown on their return for 2022.
Note. Special estimated payment rules apply to taxpayers such as farmers, fishermen, certain higher income taxpayers, casualty and disaster victims, those who recently became disabled, recent retirees and those who receive income unevenly during the year.
For more information about the estimated tax penalty, see Checkpoint’s Federal Tax Coordinator ¶ S-5201.
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