How to be More Efficient in Making Quarterly Tax Payments
With tax season upon us, many individuals and small business owners will soon be filing their taxes for the 2023 income year. Some will find, perhaps unexpectedly, that they are required to make 2024 quarterly tax payments due to not having enough withheld the prior year via an automatic withholding mechanism (paycheck withholding) or from their other sources of income including 1099 income, business income, retirement account withdrawals, etc.
Quarterly tax payments: the lowdown
According to the IRS, individuals should make quarterly tax payments if they anticipate that they will owe $1,000 more when their return is filed. They should also make payments if they paid less than 90% of their tax liability for this year or less than 100% of the tax shown on the return for the prior year, whichever is smaller.
Traditionally, the copy of your filed tax return from a tax-preparer, CPA, or a self-filing service such as TurboTax will come with quarterly payment vouchers. They display the suggested payments that should be made each quarter to the IRS and state tax board. The IRS payments are typically due around the fifteenth of each month, in the last month of the quarter (4/15, 6/15, 9/15 and 1/15). State tax deadlines will vary by state.
Individuals and businesses are expected to remit payments by this date, and should send in a copy of the 1040-ES (estimated payment) with a check to a specific IRS office depending upon your state of residence.
The issues
While many are used to making quarterly payments and are prepared for the process of mailing checks to federal and state (and sometimes city) tax collectors, others are not prepared to execute this process efficiently.
Variability of income can be troublesome when it comes to making those quarterly tax payments. People with unpredictable income flows might or might not have the funds available to make these payments when they are due.
The solutions
We often hear from our clients that they wish the process of making tax payments could be simpler. Here are some of our suggestions for simplifying and improving this process.
The IRS mobile app
The IRS2Go mobile app is the official mobile app of the IRS. Within the app, individuals are able to make various types of payments to the IRS directly from their bank account. Types of payments include quarterly payments as well as balances due for tax filings, extension payments and many others.
The IRS2Go app also offers users the ability to pay their taxes via debit cards ($2.50 - $3.00 fee), credit cards (1.85% - 1.98% fee) or digital wallet such as PayPal.
The IRS website
The IRS website offers payments directly through their Direct Pay portal. Similar to the app, the website also allows for credit card, debit card or digital wallet payments via approved processors.
Review automatic withholdings
If you are over or underwithholding consistently, it is worth investigating if you can increase or reduce the amount withheld from paychecks, retirement account distributions or Social Security/Pension benefits. This is particularly important to review after a life change such as no longer having a dependent, a large increase or decrease in income, or the passing of a spouse.
Make one-time payments as needed
If you anticipate that you will underwithhold but are not required to make quarterly tax payments, you can make one-time payments to the IRS to catch-up. This can come via a direct payment to the IRS or by purposefully over withholding from a retirement distribution. You can even consider increasing your paycheck withholdings mid-year.
Apply your current tax refund to next year’s payments
If you are owed a tax refund, consider applying that balance to the next year as an estimated payment if you anticipate higher income. In lieu of receiving a refund check or bank deposit, you can instead choose to apply those funds to your 2024 tax bill. This reduces the chance that you will underwithhold next year and prevents the tracking of this year’s refund. You may be able to reduce your future quarterly tax payments (if any) or reduce your standard withholdings as well.
We see this often with our clients when they have unique tax events such as a Roth IRA conversion.
The takeaway
We encourage clients to be aware of deadlines and to plan ahead to avoid underwithholding and late payment or interest penalties.
If helpful, create a separate tax savings account and set aside funds each month so that the money is available for payment when due. This is particularly helpful for those earning 1099 income that varies month to month who want to mitigate unexpected surprises when filing their taxes.
If you are an individual or business owner and wish to discuss tax planning and strategies for optimizing your wealth, please reach out to set up a time to talk.
Andrew Hoffarth, CFP® is a Lead Advisor with Financial Alternatives. When he’s not enjoying outdoor activities with his family, he excels at finding solutions for complex financial situations, allowing successful families to focus on what is most important to them. Schedule a time to chat with Andrew.