As the third-quarter estimated tax deadline for 2024 approaches on Monday, September 16, many taxpayers may wonder whether they need to make a payment to the IRS. Missing this deadline could lead to penalties, even for those expecting a refund. Understanding who is required to pay and how to do so effectively is crucial to avoid costly missteps.
Who needs to make a third-quarter payment?
The IRS has a simple “rule of thumb” to help determine if you need to make an estimated tax payment: If you expect to owe at least $1,000 in taxes after subtracting your 2024 withholdings and tax credits, or if you fail to meet the IRS’s safe harbor rules, you should make a payment.
The safe harbor rules require that you pay at least 90% of your 2024 tax liability or 100% of your 2023 tax liability (whichever is smaller) to avoid penalties. For high earners, defined as those with an adjusted gross income (AGI) of $150,000 or more in 2023, the threshold increases to 110% of their 2023 tax liability. Adjusted gross income can be found on line 11 of your 2023 Form 1040.
How to avoid a ‘Timing Penalty’
“Many taxpayers incorrectly assume that if they are within the safe harbor limits, they won’t have a tax payment penalty,” said certified financial planner and enrolled agent Tricia Rosen, founder of Access Financial Planning in Newburyport, Massachusetts.
However, a lesser-known issue known as a “timing penalty” could still come into play. The IRS requires that taxes be paid as income is earned throughout the year, not just by the annual filing deadline.
For 2024, the quarterly estimated tax payment deadlines are April 15, June 17, September 16, and January 15, 2025. Missing one of these deadlines may trigger a penalty calculated using the current interest rate and the unpaid amount, which compounds daily. Even taxpayers who are owed a refund could face penalties if their payments are not made timely.
Some taxpayers, including those in disaster-affected areas across 17 states, Puerto Rico, and the Virgin Islands, may qualify for an extension of their third-quarter estimated tax deadline. The IRS may offer extension deadlines for those in affected regions. It’s advisable to check IRS notices to confirm eligibility for deadline extensions.
The ‘Easiest’ way to make tax payments
The IRS provides several ways to make estimated tax payments, but electronic payment options are considered the “easiest, fastest, and most secure.” Taxpayers can use IRS Direct Pay, which allows direct transfers from checking or savings accounts, or the Electronic Federal Tax Payment System (EFTPS).
Credit card and debit card payments are also possible, though a fee is charged by the payment processor, not the IRS. Alternatively, payments can be made through the IRS2Go app or by logging into the IRS’s online account portal. For those who prefer traditional methods, payments by check or money order made payable to the U.S. Treasury are still accepted.
Why estimated payments matter
Estimated tax payments are particularly important for individuals earning income that does not have automatic tax withholdings. This includes income from self-employment, freelancing, investments, retirement accounts, and gig work. Even those with regular W-2 jobs may need to make estimated payments if their employer does not withhold enough to cover their annual tax liabilities.
Making estimated payments helps avoid a situation that tax experts like Mark Steber, chief tax information officer at Jackson Hewitt, refer to as “refund disappointment or balance due shock.” In other words, failing to make these payments throughout the year could result in either a smaller-than-expected refund or a hefty tax bill come April.
