#64: Quarterly Estimated Tax Payments

In this episode, Chris Picciurro explains the concept of quarterly estimated tax payments, which are required for self-employed individuals, business owners, or rental property owners. He discusses the due dates for these payments and the rules for calculating the amount to be paid. Chris also highlights three complications that individuals may encounter when making quarterly estimated tax payments and provides tips for making the payments.

Key Takeaways: 

  • Quarterly estimated tax payments are required for self-employed individuals, business owners, or rental property owners. 
  • The due dates for quarterly estimated tax payments are April 15, June 15, September 15, and January 15 of the following year.
  • The amount to be paid is the lesser of 100% of the previous year’s tax liability or 90% of the current year’s tax liability.
  • Complications can arise for individuals with seasonal income, significant changes in income, or when filing a tax extension.
  • Penalties and interest may be assessed for failure to make quarterly estimated tax payments.

Quotes:

  • “As a taxpayer, it’s your responsibility to make your tax payments.” – Chris Picciurro
  • “Make sure you make those quarterly estimated tax payments and work with someone to figure that out.” – Chris Picciurro

Resources:

Episode Sponsor:
Legacy Lock (http://www.teachingtaxflow.com/legacy)
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0:00:04 Intro: Welcome to the Teaching Tax Flow podcast, where the goal is to empower and educate you to legally and ethically minimize taxes paid over your lifetime.
0:00:16 John Tripolsky: Welcome back to the Teaching Tax Flow podcast, everybody. Today, episode 64, we are going to look at those quarterly estimated tax payment. So not sure what that is. You are in the right place to find out. So before we jump into it, let’s take a brief moment and thank our sponsor on this episode.
0:00:40 Ad Read: This podcast is brought to you by Legacy Lock. If you are new to estate planning or simply need to review your current plan, Legacy Lock makes it as easy as PI. Legacy Lock is a unique platform that enables you to easily complete your attorney drafted documents conveniently from the comfort of your home or office. Your first step to this peace of mind is simply visiting teachingtaxflow.com slash Legacy.
0:01:06 John Tripolsky: Welcome back to the Teaching Taxflow podcast. We are a weekly podcast designed and brought to you by teaching Taxflow. In case you didn�t know that, in case you completely skipped the intro, that�s your first time hearing about it. Welcome to the big show. I think that�s a wrestling joke. I�m not exactly sure. But regardless, today we�re going to talk about these little things that come around four times a year called quarterly estimated tax payments. So if you�re not familiar with that, Chris Pakiro, the man, the myth, the legend, the wizard, the CPA.
0:01:38 John Tripolsky: We�ll just call him a smart guy. He�s here to tell us all about it. What�s happening, Chris?
0:01:42 Chris Picciurro: Well, Judd, happy new year, first of all, happy new year to all of the people in our teaching tax flow community. Happy new year. And you might owe some tax due in a couple weeks. And you know what?
0:01:54 John Tripolsky: Let�s start off the new year with a joke, shall we?
0:01:59 Chris Picciurro: Oh, boy. Yes, I�d love to hear your joke.
0:02:02 John Tripolsky: So this one is for you, good sir. Yeah, I guess you�re this. Well, you�re more than this. Let�s put this well, you�re a very complex, but you�re a good dude. So why do you think most accountants are so good looking? Any guesses?
0:02:17 Chris Picciurro: Oh, I would say. I don�t know. That�s a good question.
0:02:23 John Tripolsky: Because they have such great figures.
0:02:26 Chris Picciurro: Oh, my word. Well, you know what, John? I can�t comment on my own figure. The only thing I could do is because we have to put it in every episode, continue to get out on the pickleball court.
0:02:38 John Tripolsky: All right? So you�re starting off the year in a good term, okay? So let�s just jump into these things. Let�s clear the air. So what in the world is a quarterly estimated tax payment? And who do these things apply to? Does this apply to everybody that�s making any money here in the states or what�s the deal with these things?
0:02:58 Chris Picciurro: Correct. So we are going to talk about federal quarterly estimated tax payments on this podcast today. And most states have quarterly estimated tax payments. States that have a state income tax. We�re going to focus on the federal side now. Let�s start off by someone that works somewhere. As an employee, their only source of income is a w two. And what happens on your w two form is that taxes are automatically withheld from your pay by your employer based on what you tell your employer, your filing statuses and what your dependents are, and you give them what�s called a w nine.
0:03:38 Chris Picciurro: So for someone that simply works somewhere, their taxes are withheld, or let�s say they�re on Social Security and retirement and they have a pension, and taxes are withheld from all those sources at an adequate amount. They don�t have to worry about estimated tax payments. But there are a lot of people out there that are self employed or business owners or rental property owners that have a lot of income that there is no tax withholding from.
0:04:04 Chris Picciurro: Right. Because you�re not employed by anyone, you are simply earning that income. You have deductions, but you�re paying tax on that net income. So as a taxpayer, it�s your responsibility to make tax payments. Now, as an employee, let�s say you get paid weekly. In that case, you actually are paying your taxes. They�re getting withheld weekly. But when you�re an employee or an employer, or you�re self employed or a business owner, you are required to make these tax payments on a quarterly basis.
0:04:37 Chris Picciurro: And there are some rules as far as how much you have to make on a quarterly basis, and there�s some penalties and interest if you don�t do. So before we dive into that, so let�s just think about the theory of, okay, I�m self employed. I should be we�re on a pay as you go tax system here in the United States. So as I go through the year, I have to make quarterly estimated tax payments. Now, the IRS does understand that people that are self employed and business owners and rental property owners, their income fluctuates. They�re not on a salary like someone that might work in corporate America.
0:05:15 Chris Picciurro: So their income is going to fluctuate. So the rules for quarterly estimates are a little flexible. And we�re first going to start with what are the quarterly estimated dates. Now, the IRS might have had a couple drinks when they decided what the quarterly estimated dates payment dates are, because you would think that the dates would be January, April, July, and October.
0:05:40 John Tripolsky: And they must have had a couple of drinks, Chris, because the word flexible does not come up very often anything related to taxes.
0:05:48 Chris Picciurro: Usually. That is true. That is true. But it gets tricky with the federal quarterly estimated tax payments, and it really revolves around the federal fiscal year end and budget. But let�s start with the first quarter. Your first quarter estimated tax payment is due on April 15 of the year. That seems pretty legitimate, pretty straightforward. And any income that you earn from January to March should be paid by April 15 on a quarterly estimated tax payment.
0:06:17 Chris Picciurro: The second quarterly estimated tax payment is due June 15, only two months after April. Yes, that is correct. Very od. But it is true. So your income for April and May are paid in June. The third quarter is September 15. So that�s going to be June, July, and August. And then the fourth quarter is January 15 of the next year. So for 2023, our fourth quarter estimated tax payment is due January 15 of 2024.
0:06:56 Chris Picciurro: Now, timeout before you guys fact check me and say, I thought the quarterly payment was due January 16 this year, you are correct. If the federal quarterly tax payment date falls on a holiday or a weekend, then it gets bumped to either. If it�s on the weekend, that Monday, or like if it�s Martin Luther King Day, then it would get bumped to the next day. So at times, the tax payment is a day or two or three after the 15th, based on if it�s on a weekend or a holiday. So we�ve got April 15, first quarter, June 15, second quarter, September 15, third quarter, January 15, on the personal side for the fourth quarter. So those are the due dates of your quarterly estimated tax payments.
0:07:46 John Tripolsky: And the best way to approach those is don�t wait until the due date. That way, if you�re off a few days, you�re not on the naughty list, as we would have said last month around the holidays.
0:07:56 Chris Picciurro: Exactly. So now we know the dates. The most complicated part of this is, how much do I pay? Because I don�t know what my income is going to be, especially for the smaller business owners that don�t have a complex accounting system. They don�t even know what their income was from the quarter before, at times. So here are the rules. Okay. As a taxpayer, and these rules go for everybody, not just business owner, but as a taxpayer, you�re required to pay in tax.
0:08:31 Chris Picciurro: At the lesser of these two numbers, 190 percent of your current tax year liability or 2100% of your prior year tax liability. And those estimated tax payments all have to be paid by January 15. So let me paint a picture. Let�s say in 2022, john, your total tax was $10,000. Okay. And let�s say in 2024, that was 2022. Let�s say in 2023, your total tax was $15,000. And let�s say you�re self employed. You would have had to pay in the lesser of 100% of your 2022 tax, which is 10,000 or 90% of your current year tax, 90% of 15,000, $13,500.
0:09:29 Chris Picciurro: You would have had to pay in the lesser of that amount by January 15 or 16th because of the holiday or weekend of 2024. So typically how this works is someone, when their tax return is completed based on their previous year�s tax, your quarterly estimated taxes are calculated. Now, in your fact fanner John, you know, you would make your quarterly payments of $10,000, and that $3,500 that you still owe, that will be due by April 15.
0:10:09 Chris Picciurro: Okay. We�re going to talk about that date in a moment. But as long as you paid in that $10,000, then you are what we call penalty proof. You are in a safe harbor and you don�t owe any money until April 15 of 2024. I�m sorry for the 2023 year. So, in general, as long as you pay in as much as your tax was the previous year, and those payments don�t only have only quarterly estimates, they can include w two, withholding, withholding from Social Security, withholding from retirement distributions.
0:10:45 Chris Picciurro: As long as that�s paid in, you�re safe and sound till April 15.
0:10:49 John Tripolsky: And actually, Chris, when we�re looking back, the IRS is basically saying, look at your previous year. So say you�re looking at, for conversation�s sake, we�ll just say you�re looking at Q one. So say I�m preparing to make a q one payment, estimated tax payment. Well, we�ll say looking back at a q one. So we�ll say, I�m in April, I�m about to make a payment. And you mentioned a tax of ten or 15,000 the previous year. So are we talking quarter to quarter comparison, or are we talking looking at the entire tax year prior and just divving that up by four? Because obviously, there�s some seasonal workers out there where, et cetera. In Michigan, there�s a lot of seasonal workers because a lot of them don�t do anything in the wintertime good point. Kind of walk us through that a little bit. Like, what does that comparison look like in general?
0:11:39 Chris Picciurro: You�re going to take the tax and you�re going to divide it by four equal payments and pay those each quarter. There are three complications to this, though, that I want to talk about. The first one you mentioned is the seasonal person. So if your income is seasonal, you can make your tax payments based on the seasonality of when you earn that income. As long as the total equals $10,000. In the example we set forth, that�s no problem. So if you don�t earn a lot of money in the winter, your first quarter, you might not even owe any tax. January, February, March. If you own a lawn care business and you don�t do snow plowing and you�re in Michigan, you probably have no income the first quarter. So you would have paid nothing in the first quarter but the second and third during the summer. And that September 15 payment, you would probably have the bulk of your income you�d be paying in.
0:12:32 Chris Picciurro: So seasonality can throw a wrinkle into things. My concern about one thing to be aware of, though, is if you don�t make those estimated tax payments, you�re going to have to include a special form when your tax return is prepared. It�s called a form 22 ten. We�ll include that in the show notes. And that form tells the IRS, hey, I didn�t earn my income equally each quarter. I earned it this amount, this quarter, this amount, the second, third and fourth.
0:13:01 Chris Picciurro: So it shows it�s an annualization of income form that you�re telling the IRS, this is why I didn�t make my quarterly tax payments on an even basis. So that�s one of our applications.
0:13:11 John Tripolsky: And that�s some great insight there, too, because we have to always assume that the IRS will not assume something in our favor. Right. So they�re not going to know unless we tell them. What was that form again?
0:13:25 Chris Picciurro: It�s a form 22 ten. I�ll give you an example of, let�s say you have a client that is a retail operation. They might be really slow the first half of the year, and they might earn 80% of their net income from Thanksgiving to Christmas. So their fourth quarter payment is going to be significantly higher than the first three quarters. Or let�s say you have a taxpayer that had a huge capital gain in the last quarter.
0:13:54 Chris Picciurro: You�re going to want to fill that form out to the IRS because you�re legitimately making a fourth quarter payment because that�s when you earned your income. So the easiest thing is make them on an equal quarterly basis. But complication number one of three, seasonality. And if you have that situation, definitely talk to a tax professional. If you are self employed, there is some software out there, Quickbooks online. Self employed, for instance, actually calculates your quarterly estimated tax payment as you go. And you can make those quarterly estimated tax payments right in the software. But we�re going to talk about at the end how to make these payments.
0:14:28 Chris Picciurro: So that�s complication number one. Complication number two is what happens if your income is lower. And this happens quite often with self employed or business owners, where they might have an amazing year in 2022, and 2023 is a lot lower. So what happens then? Because you�re making estimated tax payments based on a much higher income year. In that case, what you�re going to want to do is you�re going to want to take advantage of that 90% of current year tax safe harbor.
0:15:03 Chris Picciurro: So you�re going to want to work with your tax professional to recalculate your quarterly estimated tax payments based on a lower income amount. So that�s really important to understand. Now, that takes a little bit of effort, but I know in our private CPA practice, if someone�s income was $500,000 in 2022, and it�s only going to be $100,000 in 2023, we don�t want to set them up for quarterly estimated tax payments based on the $500,000 of income. They would take all of their income and make quarterly estimated tax payments and they�d have no income left.
0:15:35 Chris Picciurro: But be real careful if you�re going to use the 90% of current income rule to stay in what we call the safe harbor, because you really need to know what that income figure is. But that would be complication number two is what happens if your income drastically goes down and you�re set up for quarterlies based on a higher amount. The third complication comes in. In our private CPA practice, I know we have a lot of tax pros that listen to this is we have about two thirds of our client are tax extensions.
0:16:07 Chris Picciurro: So a couple things with the tax extension. A tax extension gives you more time to file your return but not pay. So remember I said so. Let�s go back to that example. Johnny T. Sole proprietor. Your 2022 tax was $10,000. Your 2023 tax was $15,000. You�re a good taxpayer. You took after your dad, and you made your quarterly estimates a week ahead of time. You have $10,000. Paid in. It�s April 1. And you�re like, hey, man, we have to file an extension. I said, this is a great idea because maybe we want to make a Sep contribution. Maybe there�s some deductions that we want to make sure we take advantage of.
0:16:48 Chris Picciurro: Let�s file a tax extension. But I know that your total tax in 23 is going to be $15,000. So I say, John, you�re going to owe $5,000. We need to make that estimated tax payment with your extension or else you could be penalized because the extension gives you till October to file your return, but doesn�t give you till October to pay the tax. So complication number three is make sure that if you�re filing a tax extension to pay any tax that you owe for the previous year with the extension, we have another complication. When you file an extension, let�s say you�re going to file in June, 1 week of June. What about the first quarter 2024? Now, that was due in April 15.
0:17:35 Chris Picciurro: So one of the hacks that we do is when we�re filing extensions for clients, we�re actually going to calculate what we think you�re going to owe for the 23 tax, and we�re going to calculate what we think you�re going to owe for the 2024 1st or second quarter tax and make that payment as an extension. That way we automatically know you�re going to be overpaid for the 2022 year and apply it to your 2023 estimated tax payments. So if you�re overpaid on your tax return in a given year, you could always apply that to your next year quarterly estimates. Now, again, this is a complication that most people don�t file extensions.
0:18:15 Chris Picciurro: So even though it is the most complex complication, it�s important to understand that when you file that extension, keep in mind that you might want to overpay a little bit because you�re also not paying your first quarter 2024, assuming that in my example.
0:18:31 John Tripolsky: And a question on that one, Chris, too, just for those that are listening, that maybe have never made these quarterly estimated tax payments before, it might seem a little unsettling to say, hey, you know what? I�m going to pay this. And, oh, my gosh, what if I overpay it like you had just mentioned there? You could roll it into future quarters. Can people opt in or opt out of that and take a refund instead?
0:18:58 John Tripolsky: Or how does that work? Is there an option there for taxpayers?
0:19:01 Chris Picciurro: Absolutely. If you overpay it, then you could take a refund on the tax return. So for our example, let�s say you�re paying your fourth quarter estimated tax payment for 2023. You�re paying that. You listen to this podcast, you�re like, all right, yeah, I think I�m going to owe you overpay. You can take a refund or you can apply to the 2024 quarterlies. It just depends on your personal situation. So absolutely, you can get a refund for that. It�s not gone to never Neverland. It�s credited to your account.
0:19:35 Chris Picciurro: Back in the day, it was like a layaway. People don�t do layaway anymore because they�re actually credit cards and stuff like that. But before that, back in the day, think about it like a layaway plan.
0:19:47 John Tripolsky: So if you�re one of those self employed individuals and say your spouse or partner significant other gets a w two, just for the sake of poking the bear with Chris, we�re going to call it a w two employee because I know he loves that so much when people refer to that. So never call anybody that, by the way. Your taxpayer will probably punch you in the throat. And if they don�t, they should. But back on track.
0:20:13 Chris Picciurro: Well, no, that�s all right. Well, at least a w two employee, it might be redundant. The one that you want to slap someone is when they say, I�m a 1099 employee, you can�t be both. Right.
0:20:25 John Tripolsky: That�s the one. See, I just play it safe. I just refer to the. I just don�t say anything anyways. But what you can do is have a little fun with it.
0:20:34 Chris Picciurro: Right?
0:20:34 John Tripolsky: If you really want to be a smart, you know what, and your partner, significant other spouse, is so proud that they get a refund every year just overpaid by a couple of bucks. And then you get a refund for a couple of dollars and say, look, I did, too, or roll it in. But anyways, back to the regularly scheduled program as we move forward.
0:20:53 Chris Picciurro: Yeah. So let�s talk about what happens if you don�t make these payments. Now, if you don�t make the quarterly estimated tax payments or you don�t pay your full tax with an extension, the IRS will assess you some penalties and interest for not paying. Now, those penalties and interest are tied with LiBor and they�re tied with current interest rates by the Fed. So three years ago, we had a lot of clients, especially our real estate investor clients, that said, you know what, I don�t care. I�m not going to pay my taxes until they�re due, until I file my return in October.
0:21:32 Chris Picciurro: And I know I�m going to get penalized 2%, two and a half percent. Well, that was pretty cheap financing. Well, now that rate is up to 7%. So the penalty for not making your estimated tax payment has over tripled in the last three years. And so now we have a lot more people making sure they make those quarterly estimated tax payments. So you could get penalized and you could pay interest on the money you should have owed the IRS either on January 15 or April 15, those two previous deadlines. So the penalties can be significant.
0:22:03 Chris Picciurro: And actually, if you owe a state tax, those are even usually more significant than the IRS. So make sure you make those quarterly estimated tax payments and work with someone to figure that out. A lot of times we tell business owners and self employed people to even set up a separate bank account that they move 25 30% of their net income in to be safe on average. In that way, it�s out of sight, out of mind and make those estimated tax payments from that account.
0:22:39 Chris Picciurro: Now, want to touch finally on how you make the payments, you�ve got a couple of options. You can go snail mail and mail in your estimated tax payments using A voucher. That form is a 1040 es. Let�s put that in the show notes also. So you can do it by mail, or you can simply set up an account with the IRS at IRS Gov and enroll in their electronic payment system where you can log in and make a payment at any time.
0:23:13 Chris Picciurro: And you can actually make a payment without logging in. But I highly recommend you set up an account up with the IRS. It�s super easy. I do it myself. And you can log in and make payments. So that way, even though you�re required to make payments quarterly, if you�re a business owner and you want to budget and want to just get those payments made monthly, you can log into the IRS system and pay monthly if you want.
0:23:36 Chris Picciurro: Just make sure that you click on the proper quarter to apply the payment to. So you could pay electronically through the IRS�s website, or you can mail the payments using a 1040 es. Or there is some software, the only one I know about for sure is Quickbooks online. Self employed, you can actually make those tax payments right through that software. So those are your options for making the payment. I personally like just making the payments right on the IRS website, and that way they�re confirmed and there�s no, hey, did the IRS cash it?
0:24:10 Chris Picciurro: Because remember, if you�re mailing a check to the IRS, typically a human�s going to process that payment and it�s just going to take time.
0:24:18 John Tripolsky: Absolutely. And we all know, right, humans, as much as we love others and love ourselves, we are a unreliable species, I guess we could say. So that being this is, this show is really an outlier. We use two words or terms or descriptions in this show as it relates to the IRS and taxes that we normally do not use. So really early on we mentioned flexibility and we wrapped up with the word easy. Doing something easy, pretty rare. I�m still in shock. So that being said, if you�re not familiar with this, take full advantage of this. I mean, we condensed a lot of information down. Christy did a great job explaining it.
0:25:03 John Tripolsky: Roughly about 20 minutes here. You don�t even have to bother doing a Google search on what the heck it is. All your information is right here. So, Chris, you described it perfect. And you guys do this all the time in your private practice, right?
0:25:14 Chris Picciurro: Absolutely. Definitely make sure you make those quarterly estimated tax payments. And I�m going to wrap up by saying, we say in teaching tax law that tax agencies are involuntary business partner. I have to say the IRS is making strides to make things easier. You would think they�ve done this a long time ago. They�re a collection agency. They�re making things easier, making things easier for you to pay.
0:25:37 Chris Picciurro: Obviously, there�s a lot of data, security concerns and that sort of stuff. So take advantage of the technology. And again, let us know if you have any questions. Happy new year and have a great rest of the day.
0:25:52 John Tripolsky: Awesome, Chris, awesome. Everybody. Take advantage of this information. Definitely take note of some of those forms Chris had mentioned in there and just the purpose behind them. Right. So we referenced that form 22 ten, I believe is what it was. And really think of that as the explainer of why you�re doing what you�re doing. But then also, like Chris, you had mentioned you wanted to detail on just those penalties alone, right? I mean, yeah, sure. The IRS is absolutely doing a lot to make life a lot easier on us, which is fantastic, right? So it�s not like we�re know, old world mafia organized crime style. They�re going to hit you in the kneecaps and take you out, but they will hit you in the bank account now, where it counts as well. So that being said, relisten to this one as many times you need to, as well as the other shows, we are rolling through these things week by week.
0:26:36 John Tripolsky: Check them out. Let us know what you think. Questions, comments, ideas, guest thoughts, shoot them to us. We love it. Same time, same place. Back here. Next week on the teaching Taxable podcast. Thanks for hanging out with us. As always here on the podcast. Hopefully you learned a little bit from this one regarding those quarterly estimated tax payments, the importance of them, and what happens if you do not make those payments, if you have to, of course, if they apply to you. So again, hopefully you took some good information from this. If you were a little confused going into it, hopefully you are not as confused about what they are moving forward.
0:27:22 John Tripolsky: And if it completely does not relate to you, well then now you know, does it relate to you? Let everybody else stress about it. So that being said, always feel free to join that defeating taxes private Facebook group, which is run by the teaching tax flow team. Just go to defeatingtaxes.com. Very easy sends you directly to that Facebook group. You don�t even have to search for it on Facebook. We make it that easy and efficient.
0:27:49 John Tripolsky: Now, speaking of easy and efficient, we have some news coming up here in the next couple weeks that we are going to start offering. Oh, you thought I was going to tell you what it was there, but I am not. I am going to leave you with a cliffhanger, but I will tell you this about the news coming down the pipeline. So the best hint I can really give you is everybody needs to do this and it has been one of the biggest asks of our community members.
0:28:21 John Tripolsky: So I won�t say anymore. I can�t talk about it anymore because I�ll start to give away too much information So until next time, let�s continue defeating taxes.
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