What Are the Rules for 2024 Estimated Tax Payments?

The U.S. income tax system operates on a pay-as-you-go basis, meaning you must pay tax on income as you receive it throughout the year. For many individuals, this is handled through employer withholding from paychecks. When income is not subject to withholding, however, taxpayers are often required to make quarterly estimated tax payments to the IRS. These payments cover income from sources like self-employment, investments, or the gig economy.

Determining Your Requirement to Pay

The obligation to pay estimated taxes is triggered when you anticipate owing a certain amount of tax for the year. Individuals, including sole proprietors, partners, and S corporation shareholders, must make estimated tax payments if they expect to owe at least $1,000 in tax for 2024 after accounting for any withholding and refundable credits. If your expected tax liability, minus your withholdings and credits, is less than $1,000, you are not required to make these quarterly payments.

To help taxpayers avoid underpayment penalties, the IRS has established “safe harbor” rules. The first safe harbor involves paying at least 90% of the tax you will owe for the current year, 2024. The second rule is to pay at least 100% of the tax shown on your 2023 tax return, provided it covered a full 12 months.

A special provision applies to higher-income taxpayers. If your Adjusted Gross Income (AGI) on your 2023 tax return was more than $150,000 ($75,000 if you were married and filed separately), the second safe harbor threshold increases. In this case, you must pay at least 110% of the tax shown on your 2023 return.

Several types of income commonly lead to the need for estimated tax payments because they are not subject to automatic withholding. This includes:

• Earnings from self-employment, such as freelance work or running your own business
• Investment income, including interest, dividends, and capital gains
• Rental income from real estate
• Royalties, prizes, and awards

Calculating Your 2024 Estimated Tax

The primary tool for calculating your estimated tax is the worksheet in Form 1040-ES, Estimated Tax for Individuals. To complete the worksheet, you must first estimate your adjusted gross income (AGI) for 2024, which includes all your expected taxable income minus specific deductions.

Once you have your estimated AGI, you will need to determine your planned deductions. This involves deciding whether you will take the standard deduction or itemize your deductions. If you plan to itemize, you will need to estimate your total qualifying expenses, such as mortgage interest, state and local taxes, and charitable contributions. You must also account for any tax credits you expect to claim.

The Form 1040-ES worksheet guides you through the calculation. You will use your estimated AGI, subtract your deductions to find your taxable income, and then apply the 2024 tax rates to calculate your expected income tax. After that, you subtract your anticipated tax credits and any federal income tax you expect to have withheld. The result is your total estimated tax that must be paid in quarterly installments.

Taxpayers have two main methods for calculating their quarterly payments. The Regular Installment Method involves dividing your total estimated tax for the year by four and paying that amount by each due date. For individuals whose income fluctuates, the Annualized Income Installment Method may be more suitable, as it allows you to adjust your payment amounts each quarter to reflect your actual income earned in that period.

Payment Deadlines and Submission Methods

For the 2024 tax year, estimated tax payments are divided into four periods, each with a specific due date. The payment for income received from January 1 to March 31 is due on April 15. The second quarter, covering income from April 1 to May 31, has a payment deadline of June 17. The third payment, for income earned between June 1 and August 31, is due on September 16. The final payment for the year, covering September 1 to December 31, is due on January 15, 2025.

Taxpayers have several options for submitting their payments. The traditional method involves mailing a check or money order with a payment voucher from Form 1040-ES. When paying by mail, the check should be made payable to the “United States Treasury.”

For electronic payments, the IRS offers multiple choices.

• IRS Direct Pay allows you to make a payment directly from your checking or savings account for free.
• The Electronic Federal Tax Payment System (EFTPS) is another free online service for scheduling payments.
• You can pay using a debit card, credit card, or digital wallet through one of the IRS’s third-party payment processors, though these services may charge a fee.

Underpayment Penalties and Exceptions

Failing to pay enough estimated tax, or paying it late, can result in a penalty. This underpayment penalty is calculated on the amount you underpaid for the duration of the underpayment, functioning like an interest charge on the unpaid tax. The IRS determines the penalty amount separately for each payment period, so it is possible to incur a penalty for one quarter even if you are due a refund when you file your annual return.

The form used to calculate this penalty is Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts. You may want to file this form with your return to see if you qualify for an exception that reduces or eliminates the penalty, or to request a waiver.

There are several exceptions that allow taxpayers to avoid the underpayment penalty. The most common way is by meeting one of the safe harbor rules discussed earlier. Another exception applies if you had no tax liability in the prior year, as long as you were a U.S. citizen or resident for the entire year and your prior tax year covered a 12-month period.

The IRS may also waive the penalty under specific circumstances. A waiver may be granted if you failed to make payments because of a casualty, disaster, or other unusual circumstance that would make imposing the penalty inequitable. A waiver may also be available if you retired after reaching age 62 or became disabled during the tax year, and your underpayment was due to reasonable cause and not willful neglect.