Although April 15 is the annual filing deadline for individuals, taxes are actually due throughout the year. The IRS requires taxpayers to pay federal taxes as they receive income. If you receive especially large capital gains during the year, use IRS Form 1040-ES to determine whether you need to make an estimated payment and the size of the estimated payment.
Underpayment of Taxes
When you earn wages from employment, your employer automatically withholds federal and state taxes from each paycheck to cover your tax liability. However, other forms of income -- like capital gains, dividends and self employment income -- don't have automatic withholding. If you have substantial income from these sources and don't withhold enough in taxes, the IRS can penalize you for underpaying your taxes during the year.
Who Must Make Estimated Tax Payments
Making estimated tax payments allows you to avoid underpayment penalties. The IRS requires taxpayers to make estimated tax payments if both of the following scenarios apply:
- You believe you'll owe more than $1,000 in taxes at the end of the year after tax withholdings and credits are applied.
- You believe your tax withholdings and credits will be less than 90 percent of this year's tax or 100 percent of your prior year's tax, whichever is smaller.
For example, say that you owed $40,000 in taxes this year, expect to owe $40,000 in taxes this year and estimate your current year withholdings and credits to be $30,000. $30,000 is less than 90 percent of $40,000, and you expect you'll owe $10,000 in taxes -- $40,000 less $30,000 of withholdings and credits -- so you must make estimated tax payments.
Determining Your Payment
Complete the IRS Estimated Tax Worksheet in Form 1040-ES to calculate the size and frequency of your estimated tax payments. There are four estimated tax payment deadlines during the year. The first-, second-, third- and fourth-quarter deadlines are April 15, June 15, September 15, and January 15, respectively, unless the deadline falls on a weekend or national holiday, in which case the deadline falls on the first non-holiday weekday following the standard date. Estimated tax payments should be made in the quarter in which you receive the capital gains. For example, if you receive all the capital gains on May 31, make your estimated tax payment on June 15. If you receive the capital gain distribution evenly throughout the year, you need to make four payments.
Making the Payment
The IRS allows taxpayers to make estimated tax payments via phone, check, money order, credit cards, debit cards, bank account transfer and wire transfer. If you make the payment by mail, include the voucher from your completed Form 1040-ES. If you'd prefer to pay online, visit the IRS Electronic Payment Options website for a list of service providers.