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I live in US and in the last two years I had a tax consultant recommend that I pay a certain amount to IRS online each January so I won't get a penalty. This year I don't have a consultant. I earned the same so assume I need to pay the same. I will do full tax calculation in April, just want to get rid of possible penalty risk now.

Should I just go to the IRS online site and pay there based on my SSN? Then in April in tax calculation I factor in that amount? Or do I need to do something out of bounds first before paying online? It feels strange just surfing there, giving a few digits, and transferring money.

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    He was referring to quarterly estimated payments. irs.gov/businesses/small-businesses-self-employed/… – RonJohn Jan 7 at 0:47
  • Are you self-employed? – BrenBarn Jan 7 at 5:35
  • not self employed. yes I think this is the estimated payments. want to know if I just go and pay them online and later own bake that amount into my final tax report? the online payment system would give me reference number for that? – Yaron Naveh Jan 7 at 5:45
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    In general you don't need to make estimated tax payments unless you have significant income that isn't subject to tax withholding. Self-employment is the common case, but it can also be necessary if you have large capital gains, etc. You may want to try to figure out why this consultant was advising you to make these payments. – BrenBarn Jan 7 at 5:51
  • Also read the IRS instructions on the "safe harbor" provisions. Basically, as long as you paid (through withholding or estimated tax payments) at least as much tax as you owed in the previous year, you don't have to worry about penalties. And you can pay estimated tax either on-line, or by mailing a check with your form 1040-ES. – jamesqf Jan 7 at 17:58
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The reference to January seems to suggest they are talking about paying estimated taxes, but the idea that paying in January is sufficient to avoid the penalty is incorrect.

If the taxes withheld from your paycheck by the end of the year reaches 90% of your tax liability for this year, or 100% (110% for higher incomes) of your tax liability for last year, whichever is lower, you do not need to pay estimated taxes, and you have no underpayment penalty.

If your withheld taxes by the end of the year does not reach either of those levels, then you need to pay estimated taxes. In that case, you need to have paid enough estimated taxes for each quarter by the quarterly estimated tax deadline to avoid the penalty:

  • Estimated taxes for Jan-Mar are due Apr 15
  • Estimated taxes for Apr-May are due Jun 15
  • Estimated taxes for Jun-Aug are due Sep 15
  • Estimated taxes for Sep-Dec are due Jan 15 of the next year

Unlike with tax withholding (where you can avoid the penalty by increasing your rate of withholding near the end of the year so you reach the required level by the end of the year), you cannot avoid the penalty by simply paying all the estimated taxes for the year in the last quarter, by January 15 of the next year. If you are required to pay estimated taxes (i.e. your withholding for the year was not enough), and you have paid an insufficient amount of estimated taxes in a previous quarter (calculated by one of several methods) by its deadline, then you owe an underpayment penalty even if you make up for underpaid amount in estimated taxes in a future quarter.

To answer your questions, yes, you can pay estimated taxes online here. You will enter the amount you paid in estimated taxes for the year on your tax return (for 2018 taxes, it's on Form 1040 Schedule 5 line 66; for 2019 taxes, it's on Form 1040 Schedule 3 line 8) and it will add to other taxes you have paid, reducing the amount you owe or increasing your refund. The underpayment penalty (including paying insufficient estimated taxes for some quarters) is calculated on Form 2210, and if there is a penalty amount, you will enter it on Form 1040 (for 2018 taxes, it's on Form 1040 line 23; for 2019 taxes, it's on Form 1040 line 24) and it increases your tax owed or reduces your refund.

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    Note if you don't use software (or a preparer, who does so) and you don't want to do the computations on form 2210 by hand, you are allowed to omit it and IRS will compute it and bill you. FWLIW this also gives you about 6-8 weeks more time to pay the 'penalty' part (only). – dave_thompson_085 Jan 8 at 13:25
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Here's what the IRS says about underpayment penalties:

Penalty for Underpayment of Estimated Tax

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

If you have paid 100% of your previous year's total taxes in advance (through a combination of withholding and manual "estimated tax" payments), the tax forms for the next year won't tell you that you owe an underpayment penalty. There's a line on the tax forms for entering the total amount of estimated payments you made for that tax year, and the IRS presumably matches that up with their records of how much you actually paid them in advance through the online system to make sure you put in the right number.

If you don't make any extra estimated tax payments, and the withholdings your employer computed for you based on your W4 fall more than $1000 short of the actual tax you end up owing (which includes things like capital gains income, loan forgiveness, and other stuff you had no way of predicting and no mechanism or reason for informing your employer about in advance), then you can owe an underpayment penalty, apparently as punishment for not predicting the future.

(Also, some states have basically the same system, so when you pay extra money to the IRS to avoid underpayment, check to make sure you are also paying your state enough to avoid underpayment.)

In theory there's a quarterly breakdown of when you are supposed to pay the estimated tax if you are required to pay it (as computed by the 1040-ES form), but I haven't been able to find any information on the penalty for paying late, other than the final underpayment penalty on your return for the tax year. And if you aren't required to make estimated tax payments, and are just trying to ensure you hit the minimum payment threshold for the year, I don't see any rules about when you would have to make them, except that it would be before the final quarter's deadline, which is some time in January of the following year.

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    The penalty is precisely equal to the interest on any amounts paid later than the latest you could have paid them with no penalty. It is computed using an equivalent yearly interest rate of 6%. So if you should have paid exactly $1,000 on January 15 to avoid any penalty and instead you paid that on April 15, the penalty would be about $15. (Note that this only applies if the full amount is paid by April 15. Otherwise, it gets much worse.) – David Schwartz Jan 7 at 19:40
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    "If you have paid 100% of your previous year's total taxes in advance (through a combination of withholding and manual "estimated tax" payments), the tax forms for the next year won't tell you that you owe an underpayment penalty." This isn't entirely accurate, because it seems to suggest that if you need to pay estimated tax payments, you can just pay them all at the end of the year, and as long as it's enough, there's no penalty. But in reality, if you need to pay estimated taxes, and you didn't pay enough for the first 3 quarters, you owe a penalty even if you paid enough for the whole year – user102008 Jan 8 at 4:16
  • @user102008: Not necessarily true, though it may be in some cases. Getting a large payment in the first quarter but not paying estimated tax on it until the last quarter may be treated differently from getting the same large payment in the last quarter. – jamesqf Jan 8 at 4:31
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    @jamesqf: Right, I said "pay enough" for the first 3 quarters, where "enough" can be chosen by you to be calculated via the annualized income method so it will only be based on the income up to that quarter, if that would be more beneficial than dividing the whole year's income evenly. But unless the first 3 quarters are very low income and almost all the income was in the 4th quarter, some payment would still have been required the first 3 quarters, which means there will be a penalty even if you pay the entire year's worth of estimated taxes in the 4th quarter. – user102008 Jan 8 at 5:51
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    @DavidSchwartz: yes it's computed as interest, but at rates set each quarter as the Treasury market rate rounded off plus 3%. For most of 2017 this was 4% and for 2018 5%; for 2019Q2 it is 6% but Q3 Q4 and 2020Q1 are 5%. As long as any FMOC participant being present in a city where the word 'increase' is mentioned causes the financial markets to completely melt down, this rate will probably not vary much. – dave_thompson_085 Jan 8 at 13:28

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