Form 540-ES: How to Pay California Estimated Taxes
Navigate California's estimated tax system. This guide clarifies how Form 540-ES is used to manage and submit quarterly state tax payments.
Form 540-ES is for California residents to pay state income tax on earnings not subject to withholding, such as income from self-employment, gig work, or investments. These estimated payments are part of the state’s pay-as-you-go system, requiring you to remit taxes as income is earned. Making these quarterly payments helps you manage your state tax obligations proactively and avoid a large balance due when filing your annual return.
Determining if You Need to Make Estimated Payments
You must make California estimated tax payments if you expect to owe at least $500 in state income tax for the year, or $250 if you are married and filing separately. This obligation arises when you anticipate that the tax withheld from your paychecks and any credits will be less than your total projected tax liability. The Franchise Tax Board (FTB) imposes a penalty for underpayment if you pay too little tax during the year through either withholding or estimated payments, making compliance important.
This situation is common for individuals with income sources that do not have automatic tax withholding. Such sources include:
- Self-employment, independent contracting, or a small business
- Rental property income
- Interest and dividends
- Significant capital gains from the sale of assets like stocks
If your income is solely from a salary where your employer withholds taxes, you may not need to make these payments unless your withholding is insufficient.
Calculating Your Required Estimated Tax Payments
To meet the state’s “safe harbor” rule and avoid a penalty, you must pay the lesser of two amounts: 90% of your current year’s tax or 100% of the tax shown on your prior year’s return. If your prior year adjusted gross income (AGI) was over $150,000, or $75,000 if married and filing separately, you must pay 110% of your prior year’s tax.
Basing payments on your prior year’s tax is a straightforward option if your income is stable. If you expect your income to change significantly, it is better to estimate your current year’s tax. This method requires you to project your total expected income, subtract any anticipated adjustments and deductions, and then calculate the resulting tax. The Form 540-ES package includes a detailed worksheet to guide you through this calculation.
California requires payments to be made on a specific schedule. You must pay 30% of the required annual amount by the first quarter deadline, a cumulative 70% by the second quarter deadline, and the final 30% by the fourth quarter deadline. This payment structure is unique to California’s estimated tax system.
Information and Documents for Completing Form 540-ES
To prepare a payment by mail, you must first complete a Form 540-ES payment voucher. The voucher requires your full name as it appears on your tax return, your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN), and your current address. You will also need to enter the calculated payment amount for the specific quarter.
The official Form 540-ES package, which includes the necessary vouchers and a calculation worksheet, can be downloaded from the California FTB’s website. The package contains four separate payment vouchers, labeled as Voucher 1 through Voucher 4, for each of the payment due dates. When you are ready to make a payment, you will select the correct voucher for that quarter.
Submitting Your Payments
You can submit your payment by mail by making a check or money order payable to the “Franchise Tax Board.” To ensure proper crediting, write your SSN or ITIN on the check’s memo line, followed by the tax year and “Form 540-ES”. The completed payment voucher must be included with your check and mailed to the address specified on the voucher.
As an alternative, the FTB offers electronic payment options. You can pay directly from a bank account using the FTB’s Web Pay service, which does not charge a processing fee. You can also pay by credit card, though this method typically involves a service fee from a third-party processor. When you pay electronically, you do not need to mail a physical Form 540-ES voucher.
Payments must be submitted by the established deadlines to avoid penalties. The due dates are April 15, June 15, and January 15 of the following year. California does not require a payment for the third quarter, which is usually due in September. If a due date falls on a weekend or holiday, the deadline is extended to the next business day.