How to avoid a penalty by making quarterly tax payments by Sept. 15

If you haven’t remitted a portion of your income to the IRS in the past few months, this week is your last chance to avoid a tax penalty.

The deadline for third-quarter estimated taxes is Sept. 15, and it applies to income from self-employment, small business, investments, gig economy work and more, according to the agency.

“It’s a pay-as-you-go system,” said certified financial planner John Loyd, owner of The Wealth Planner in Fort Worth, Texas. “A lot of people don’t find out until they file their tax returns, and they get a very nasty surprise.”

More from Personal Finance:
55% of workers say their wages are not keeping pace with inflation
This is how you weigh up whether an HSA makes sense for you
There are only a few weeks left to claim a portion of the $1.2 billion IRS fee refund

While many workers withhold taxes from every paycheck, others have to make payments four times a year. The late payment penalty is 0.5% of your balance due, up to 25% for each month after the deadline.

You can make quarterly estimated tax payments through IRS Direct Pay, send money through your IRS online account, or another option listed on the IRS payments website. However, experts are urging taxpayers to pay online.

“I would much rather pay electronically and have a record of it,” said JoAnn May, a CFP and CPA who founded Forest Asset Management in Berwyn, Illinois. She noted that estimated state tax payments may also be due for some applicants.

I would much rather pay electronically and have a record of it.

Johanna May

Director at Forest Asset Management

How to avoid federal tax penalties

You can avoid federal penalties by paying 90% of your 2022 taxes or 100% of your 2021 bill, whichever is less, during the year if your adjusted gross income is $150,000 or less. (You’ll need 110% of your 2021 bill if you earn more than $150,000.)

“As long as you put that amount into the system, your income could quadruple, and it doesn’t matter,” Loyd said. “You will not have an estimated tax penalty.”

Of course, if you file taxes in April, you’ll still need to set aside enough money to cover the entire year’s dues, he said.

IRS could do more audits against high earners

Why Some Don’t Make Estimated Quarterly Tax Payments

While estimated payments can help avoid penalties, some applicants may intentionally skip them despite the late fee, experts say.

“The word punishment scares people,” says Marianela Collado, CFP and CPA at Tobias Financial Advisors in Plantation, Florida. “But it’s nothing but the IRS charging you interest.”

In some cases, the decision to make estimated payments hinges on an entrepreneur’s cash flow, she explained, or the ability to make more by investing the money elsewhere.

However, they still have to save the money for quarterly taxes along with the penalty, and “not everyone has the discipline,” Collado added.

Leave a Comment

Your email address will not be published. Required fields are marked *