Howdy, this is David Groce, your Texas Tax and Law Man. Let’s talk about Making Estimated Tax Payments. If you are self-employed or own a small business, like an LLC or S Corp, making estimated payments will save you money.

For the last ten years, we have enjoyed historically low interest rates, which lessened the sting of not making estimated payments. However, since March of 2022 interest rates have risen four (4) percentage points. These rate increases affect everything from home mortgages to car loans, and the rates the IRS charges for late payment penalties.

To be clear, there is no law that says you MUST make estimated payments. However, Internal Revenue Code Section 6654 says that if you do not make estimated payments, the IRS will charge you interest on the unpaid taxes from the estimated quarterly filing dates based on the underpayment tax rate. When these rates were four points lower, many small business owners opted to sit on their cash and not make estimated payments. They simply paid all they owed by 4/15 and paid the interest they owed.

But now, the underpayment tax rate is now 7% and that interest rate compounds daily.

Estimated payments present a method to save this seven percent (7%) interest charge. If you owe $20,000 in tax, that late payment interest would be $1400 if you paid by April 15th. To save this penalty, you need to use the IRS safe harbor rule and pay in either 100% of the tax you owe or 110% of last year’s tax in quarterly increments.

Suppose you owe $18,000 in taxes for 2023, your safe harbor amount for 2024 would be 110% of $18K, or $19,800. For simplicity, let’s round up to $20,000 as your 2024 safe harbor amount. You need to pay this $20,000 in four quarterly installments that will be due as follows:

4/18, 6/15, 9/16, and 1/15/2024

When you come to April 15th, 2024, you will have already paid your estimated tax due of $20,000 and you would not be charged the $1400 penalty.

To make your payment, you can mail a check using the 1040 ES Vouchers. If we prepare your taxes, email us and we will be glad to send them to you or include them with your 2022 tax filings.

Alternatively, you can go to www.IRS.gov/payment and make an electronic payment online. Make sure to select 2023 as the tax year and Estimated Payment, when it asks you what type of payment.

In these economic times, every dollar counts. So, if you have money in the bank or can afford to make these estimated payments at all, consider these estimated payments a good investment - they are saving you (making you) 7%.

Until next time, Adios!

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