U.S. taxpayers are required to prepay their U.S. income and employment taxes (collectively, “tax”) during the course of the year. To the extent taxes withheld from your income are not sufficient for this purpose, estimated tax payments must be made. Accordingly, if your income is substantially from wages subject to withholding, you may not be required to make estimated tax payments. On the other hand, it is likely you will have to pay estimated tax if you are:
- A U.S. citizen working in the United States working for an international organization; or
- You have significant self-employment, pension or investment income
When required, estimated tax payments are due on:
- April 15,
- June 15,
- September 15, and
- January 15 of the following year.
If a due date falls on a Saturday, Sunday, or legal holiday, the payment date is extended to the next business day.
Special Due Dates for Nonresidents
Nonresidents (such as certain G-4 visa holders of international organizations) who are not employees with wages subject to U.S. withholding are allowed to make their estimated tax payments in three payments due June 15 and September 15 of the current tax year, and January 15 of the following year. In such a case, 50 percent of the annual requirement must be paid with the June 15 installment.
Generally, most people rely on making required installments of estimated tax using the smallest amount determined under two alternative methods:
Estimated Payments based on your Current Year Tax
Under this method, the amount of any required estimated tax payments is equal to 90% of the tax shown on your tax return for the current taxable year divided into four equal installments. Of course, when using this method, you will have to project your tax liability for the entire taxable year which may not be easy, especially if you are self-employed.
Estimated Payments based on Last Year’s Tax
The estimated tax payment for each quarter under this method is 100% of the taxshown on your tax return for the immediately preceding year divided into four quarterly installments. However, each installment should be based on 110% of your prior year’s tax if your adjusted gross income on such prior year’s return was more than $150,000 ($75,000 if you were married and filed a separate return).
One caveat; this method cannot be used if you did not file a return for the preceding taxable year or if the preceding taxable year was not a 12-month period. This situation occurs most often when a G-4 visa holder retires from an international organization and then obtains lawful permanent resident status (e.g. “green card”). When the international organization employee retires, becomes a green card holder and begins receiving pension payments, he/she should then start making quarterly estimated tax payments based on a projection of his/her current year tax.
Estimated Tax Penalty
Failure to make payments of estimated tax will subject you to a penalty. The current penalty rate is 3% per annum of the amount of estimated tax that was not paid timely.
Notwithstanding the above, no estimated tax payment is required with respect to a taxable year if your tax for the taxable year, after subtracting credits and taxes withheld, does not exceed $1,000. In addition, you do not have to pay estimated tax if you had no tax liability for the prior taxable year, the prior taxable year covered a 12-month period and you were a U.S. citizen or resident for the entire year.