The Third-Quarter Estimated Tax Deadline Is Here: What You Need to Know
As the third-quarter estimated tax deadline for 2024 approaches on Monday, Sept. 16, many taxpayers are wondering if they need to make a payment and how to avoid potential penalties. This deadline is crucial, and missing it could result in an interest-based penalty. Even those who usually receive a tax refund may need to pay estimated taxes to avoid these penalties. Let’s break down what you need to know.
Key Takeaways:
- Don’t wait until the last minute! The September 16th deadline is quickly approaching, and failing to make your estimated tax payment by then could land you in hot water.
- The safe harbor rules are not a guaranteed pass. Even if you’ve made enough tax payments to fall within the IRS’s safe harbor rules, you could still face a “timing penalty” if you’ve earned income but haven’t paid taxes on it.
- Not sure if you need to make an estimated tax payment? The IRS has a helpful “general rule of thumb”: If you expect to owe at least $1,000 in taxes after subtracting your withholdings and tax credits, you should consider paying estimated taxes.
Who Needs to Pay Estimated Taxes?
Most taxpayers have taxes withheld from their paychecks. This ensures that they are paying taxes on their earnings throughout the year. However, certain individuals may need to make estimated tax payments to avoid incurring penalties. You may need to pay estimated taxes if:
- You are self-employed or receive income from gig work, contracting, or other forms of non-traditional work, as these usually don’t have taxes withheld.
- You have investment income or retirement income that isn’t subject to withholding.
- You have had enough income that your withholdings from a full-time or part-time job weren’t enough to cover your taxes.
Understanding the Safe Harbor Rules
To avoid penalties, the Internal Revenue Service (IRS) has established safe harbor rules. These rules allow taxpayers to avoid penalties if they meet certain payment thresholds. Essentially, you have to pay at least 90% of your 2024 tax liability or 100% of your 2023 taxes, whichever is smaller. You must meet these thresholds throughout the year. If your adjusted gross income (AGI) was $150,000 or higher in 2023, the percentage climbs to 110%. You can find your AGI on Form 1040, line 11, from your 2023 tax return.
Don’t Be Fooled By the Safe Harbor: The Timing Penalty
While the safe harbor rules may seem like a straightforward pathway to avoiding penalties, it’s important to understand a key concept: the timing penalty.
As Tricia Rosen, a Certified Financial Planner and Enrolled Agent, points out, "Many taxpayers incorrectly assume that if they are within the safe harbor limits they won’t have a tax payment penalty." However, she goes on to explain that "Even with a refund, you can still incur a timing penalty, because the IRS requires tax payments on your income as it’s earned."
This penalty is a "timing" penalty because the IRS expects you to pay taxes on your income as you earn it. Even if you make enough tax payments to satisfy the safe harbor rules, failing to make your quarterly payments on time can lead to penalties.
Missing Your Tax Payment Deadline: The Consequences
Missing a quarterly estimated tax payment deadline can trigger an interest-based penalty. This penalty is calculated using the current interest rate, and the amount you should have paid. It also compounds daily, so the longer you wait to make the payment, the larger the penalty.
Filing for an Extension
If you can’t meet the payment deadline, you might consider filing for an extension. This will give you extra time to file your taxes, but it doesn’t delay the payment due date. You are still required to make your payment by the original Sept. 16th deadline.
How to Make Your Estimated Tax Payment
There are several options for making your estimated tax payments:
- Online: The most convenient method is to pay online through the IRS’s IRS Direct Pay. You can also use a third-party payment service.
- By mail: You can mail your payment along with a Form 1040-ES (Estimated Tax for Individuals). Ensure the payment arrives by the due date.
- By phone: You can call a payment processor, such as PayUSAtax, to make your payment by phone.
Natural Disasters and Extensions
The IRS offers tax relief and extensions for individuals affected by natural disasters. If you are in one of the 17 states, Puerto Rico, or the Virgin Islands that have been declared disaster areas, you may have more time to make your third-quarter estimated tax payments.
Seek Professional Guidance
If you’re confused about whether you need to make estimated tax payments or have questions about your tax liability, consider consulting a tax professional. They can review your financial situation and guide you toward the best course of action.
Final Thoughts
Paying estimated taxes can seem daunting, but it is essential for avoiding penalties and ensuring you are meeting your tax obligations. Remember, the IRS’s safe harbor provisions offer a valuable roadmap, but they don’t guarantee a penalty-free experience. Stay informed, track your income, and plan accordingly.
