How To Avoid Quarterly Tax Payments
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Key Takeaways
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During an otherwise beautiful spring tax season, an ugly experience lurks in the shadows.
The accomplishment of submitting your tax return accurately and on time, perhaps even with an expected refund, is ruined. When along with your filed tax return, come "payment vouchers" requesting you pay an amount of "estimated taxes" over the next year.
Thinking about taxes once per year in the spring is more than enough for most people. But, for certain individuals, the IRS requires lump sum payments multiple times throughout the year. Called "quarterly taxes" or "quarterlies", certain taxpayers break out the checkbook each quarter and write a special check to Uncle Sam (and their state governments, where relevant). The threat of penalties looms for non-compliance.
If you're paying quarterlies, consider these must-know facts about "quarterly taxes" and how to improve your quality of life by reducing or eliminating them.
Annual Taxes
Most people are familiar with annual taxes, especially those who earn a salary or wage. With annual taxes, your tax obligation is estimated and required to be paid during the year. Usually, a portion of income is taken out of each paycheck and "withheld"—sent to the government in your name to pre-pay your expected tax obligation. This usually happens automatically, behind the scenes before you receive your paycheck. Then, once you file your tax return, you're asked to pay the remaining amount owed to the IRS, if any. Or, if you've overpaid throughout the year, you'll receive a refund.
Quarterly Taxes
With quarterly taxes, your tax obligation is still estimated and required to be paid during the year, but your tax withholdings won't be enough to cover your expected tax obligation. Your income might still be automatically "withheld" from each paycheck, but too small a portion of income is withheld. If so, during the next year, you may be required to keep up with your expected tax obligation by paying more each quarter (April, June, September, and January of the following year) by making a manual tax payment.
What Typically Causes Quarterly Taxes?
For some who are required to pay quarterlies, the expense of quarterly taxes can become expected, even normal.
For others, a voucher notice requiring an upcoming payment can come as a surprise.
Worse, these tax expenses are often due if you’ve received additional income throughout the year from a major life change or transition, such as:
- Job promotion
- New self-employment income
- Retirement (with new account distributions)
- Start of Social Security
- Sale of a home
- Roth conversion
- Capital gains
- Interest and dividends
- Windfall
- Prizes and awards (including that lottery win)
- Alimony (in some cases and in some states, not all)
How Do I Know If I’m Required to Pay?
Many individuals who are expected to pay quarterly taxes will find "payment vouchers" on the first few pages of their newly filed tax return. Otherwise, if you owe $1,000 or more when your return is filed, quarterly taxes are typically required for those who are expected to owe additional taxes not covered elsewhere.
The IRS offers its own Tax Withholding Estimator. It recommends using the calculator at the beginning of the year, especially if you’ve recently experienced a major life event—marriage, the birth of a child, buying a home, etc.
This tool allows individuals and couples to determine how much they could be required to owe when filing their next tax return.
How Do I Know When I’m Required to Pay?
Just as they sound, quarterly taxes are due at the end of each quarter, by mid-April, mid-June, mid-September, and mid-January of the following year.
For the 2024 tax year, quarterly taxes are due as follows:
| Income Period | Due Date |
| January 1 - March 31, 2024 | April 15, 2024 |
| April 1 - May 31, 2024 | June 17, 2024 |
| June 1 - August 31, 2024 | September 16, 2024 |
| September 1 - December 31, 2024 | January 15, 2025 |
While you must pay a pre-determined amount by the end of each quarter or face penalties, you can make payments weekly, monthly, or however often is needed before the due date.
Options to Help Avoid Quarterly Payments
If you owe "quarterlies", consider any of the following options to help you stay ahead and reduce or eliminate the need to write a quarterly tax check.
"Applying Forward" Your Tax Refund:
If you receive a tax refund, consider applying some or all of your refund forward to next year.
If you can forgo the cash, and considering that you'll soon be sending the same cash back to the government, consider applying your tax refund to next year's taxes. This can potentially eliminate your need to write a check each quarter.
Adjust Your Paycheck (or Pension Benefit):
If you currently earn a paycheck or pension benefit payment, consider asking your employer or institution to adjust your tax withholding from your paycheck.
Per USA.gov, for federal tax withholding:
- Submit a new Form W-4 to your employer if you want to change the withholding from your regular pay.
- Complete Form W-4P to change the amount withheld from pension, annuity, and IRA payments. Then submit it to the organization paying you.
For state tax withholding, contact your state’s tax agency.
Withhold From A Retirement Account Distribution:
Withhold (or allow us to help you withhold) a portion of a distribution from a retirement account for taxes.
This works best from a pre-tax retirement account like an IRA or 401(k), and primarily for those who are already taking distributions (preferably after required distributions have begun).
Keep in mind that this option has the potential to disrupt an investment strategy or require taxes of its own. You don't want to take a distribution only to have to take another to cover the taxes on that distribution.
If you're under age 55 or 59.5, this option isn't for you. You face a 10% early withdrawal penalty even if the full withdrawal is sent directly to the government to pay a tax bill.
Missed Quarterly Payments
If you miss a quarterly payment due date, an IRS penalty can be assessed.
One solution to a missed quarterly payment is to consider additional withholding from a retirement account. Withholdings from a retirement account are treated as paid throughout the year, regardless of the actual date paid. In fact, even if paid on December 31, they are treated as evenly paid throughout the year.
Adjust Your Social Security Benefit
If you receive a Social Security benefit payment, consider withholding taxes from your benefit using Form W-4V.
Social Security defaults to withholding 0% of your benefit for taxes. Some say this sets beneficiaries up for a nasty surprise come tax time when they find out taxes due on their previously paid benefits.
Form W-4V is short and relatively easy to complete, but it must be printed, signed, and mailed to your local Social Security office.
We suggested approaching the Form W-4V as follows:
- Insert your contact information on page 1, under questions 1, 2, and 3.
- Leave questions 4, 5, and 7 unchecked or blank.
- The only decision to make is on question 4, where you'll check one of the boxes to select your percentage withholding. In general, we see this amount as similar to your average effective tax rate: your taxable income divided by your total tax bill.
- Sign, date, and then mail it to your local Social Security office.
Expect the completed Form W-4V to take a few weeks or months to process.
Use THe IRS Direct Pay Tool:
Make (or allow us to help you make) a payment to the IRS from your bank account or a non-retirement account.
Go to www.irs.gov/etpay to submit an electronic payment.
- Under "Pay Now" and then under “Pay from Your Bank Account,” select the blue button “Pay Now with Direct Pay.”
- Click “Make a Payment”.
- Under “Reason for Payment,” select “Estimated Tax.”
Keep in mind this option has the potential to disrupt an investment strategy or require taxes of its own depending on how cash for the payment is created.
withholding 90% of next year's actual taxes
You've met your tax withholding requirements if you withhold 90% of the actual payment you will owe.
The government expects your income to remain consistent each year regardless of what actually occurs in your life. If you know your income has declined versus last year, you may be able to pay less than your "quarterly payment vouchers" state. If you've paid 90% of your actual tax bill, you're in the clear.
Keep A Record of Every Payment
No matter your method of payment, keep a record of every payment you make to the IRS. You'll need to be ready to share this evidence if you ever believe the IRS doesn’t show one or more payments you’ve made.
There are many reasons why the IRS would miss a payment and still show a balance due, including identity theft or that your payment was applied incorrectly. If you find yourself in this situation, contact us. In the meantime, consider reading more at the IRS' Tax Payer Advocate Service.
Next Steps
You must pay taxes as you earn or receive all types of "income" during the year, either through withholdings or estimated quarterly tax payments.
Paying estimated taxes elsewhere throughout the year can prevent you from being surprised at tax time or, worse, hit with a penalty from the IRS. While we don’t want to withhold too much and give a “free loan” to the IRS, with the penalties for under-withholding at around 8% recently, the peace of mind of knowing you've paid your tax bill has value.
If you're wondering if you're withholding the ideal amount or how to avoid potential penalties and surprise bills during tax season, we can help you.
To put quarterly taxes in the rearview mirror, reach out to us today by phone at (775) 827-0670, or schedule a Quick Connection time with us at www.openwindowFS.com/connection.