How to Make Alabama Estimated Tax Payments

Alabama’s pay-as-you-go tax system requires you to pay income tax as you earn it throughout the year. For many people, this is handled automatically through employer withholding. However, if you receive significant income from sources not subject to withholding, you may need to make quarterly estimated tax payments to the Alabama Department of Revenue. These payments cover your projected tax liability and prevent a large, unexpected tax bill when you file your annual return.

Who Must Make Estimated Tax Payments

You are obligated to make Alabama estimated tax payments if you expect to owe at least $500 in state income tax for the year, after accounting for any taxes withheld and credits you can claim. This situation commonly arises for individuals with income not subject to employer withholding. Examples of this type of income include earnings from self-employment, independent contractor work, or a small business.

Other sources are investment income, such as interest and dividends, profits from the sale of assets like stocks or real estate, and rental income from property. The requirement also extends to sole proprietors, partners in a partnership, and shareholders in an S corporation. These business structures are pass-through entities, meaning the income passes to the owners’ personal tax returns, and the responsibility for paying tax on that income falls to the individual owners.

Calculating Your Required Payment

Alabama provides two primary methods to calculate your estimated tax payments and avoid penalties. The most direct approach is the “safe harbor” rule. Under this guideline, you can avoid a penalty by paying 100% of the total Alabama income tax you owed in the previous tax year, provided that the prior year’s return covered a full 12 months.

A special provision applies to higher-income taxpayers. If your Alabama adjusted gross income (AGI) in the prior year was more than $150,000 ($75,000 if married filing separately), you must pay 110% of the previous year’s tax liability to meet the safe harbor requirement.

Alternatively, you can calculate payments based on your expected income for the current year. This method requires you to project your annual gross income, subtract applicable deductions, and factor in tax credits to estimate your total tax liability. You must pay at least 90% of this projected current-year tax to avoid a penalty. Once you have this annual estimate, you divide it by four to determine the amount for each quarterly payment.

For those with income that fluctuates, an annualized income installment method allows payments to mirror when income is received.

Required Forms and Payment Deadlines

To make estimated tax payments, you must use Form 40ES, Estimated Tax for Individuals, which can be downloaded from the Alabama Department of Revenue’s website. This form includes payment vouchers for each of the four quarterly payments. Each payment voucher requires your full name, current address, and Social Security number. You must also enter the precise amount you are paying for that quarter based on your calculations.

The payment deadlines are spread throughout the year in quarterly installments.

• First Payment: April 15
• Second Payment: June 15
• Third Payment: September 15
• Final Payment: January 15 of the following year

If any of these dates fall on a weekend or a state holiday, the deadline is extended to the next business day.

How to Submit Your Payments

You have two primary methods for submitting your payment and Form 40ES voucher to the Alabama Department of Revenue. The first option is to pay by mail. You will need to write a check or get a money order made payable to the “Alabama Department of Revenue” and include it with your completed voucher. The mailing address is: Alabama Department of Revenue, Individual Estimates, P.O. Box 327485, Montgomery, AL 36132-7485.

The second method is to pay electronically through the state’s online portal, My Alabama Taxes (MAT). This system allows for a direct payment from your bank account. On the MAT website, you can select the “Make a Payment” option, choose “Individual Income Tax” as the account type, and “Estimate Payment” as the payment type before entering your taxpayer information and payment details.

Underpayment Penalties

Failing to pay enough tax through withholding and timely estimated payments can result in a penalty for the underpayment of estimated tax. A penalty is applied if you paid less than the required amount established by either the safe harbor or current year estimation rules.

The calculation of this penalty is handled using Form 2210AL, Underpayment of Estimated Tax by Individuals. This form helps determine if you owe a penalty and the amount due. The penalty is based on the amount of the underpayment for each quarterly period and the interest rate for that period.

The state provides some exceptions, such as if the underpayment is less than $500 or if you are a farmer or fisherman meeting specific income requirements. If you believe you have underpaid, complete and file Form 2210AL with your annual tax return to accurately calculate and report any penalty owed.