June 21, 2024 by Steve Banner, EA, MBA
The first thing we need to talk about here is what is meant when the IRS and many individual states use the term “estimated tax.” The mischievous part of me would like to take the quickest approach and decide that I don’t owe any tax to the Feds or Illinois because I simply estimate that my tax is zero! Unfortunately, it doesn’t work that way and I don’t think the taxing authorities would see the joke.
Contrary to my wild daydreams, the estimated tax system allows taxpayers to pay the tax related to various types of income they may receive that has not had tax withheld from it. Regular employees are usually not subject to estimated tax because the paychecks they receive have already had taxes withheld from them. But this is not the case for small business owners, independent contractors and other self-employed taxpayers. For these folks, taxes are normally not withheld from the payments they receive, and, thus, they may make a tax payment up to four times each year based on their estimated income for the period.
In fact, estimated taxes may be made for any type of taxable income that has not been subjected to withholding. This can include things like earned income, dividend income, rental income, interest income, capital gains, and even income from cryptocurrency. However, as we shall soon see, there are rules that set out the conditions for whether or not an individual is subject to paying estimated tax.
For example, it would be rather tedious for my buddy Jack to have to send four payments of $10 to the state to cover the liability on the interest income he expects to receive during the year from his local bank. On the other hand, Jack must make estimated income tax payments if he reasonably expects his tax liability to exceed $1,000 after subtracting his Illinois withholding, pass-through withholding, and tax credits for:
- income tax paid to other states,
- Illinois Property Tax paid,
- education expenses,
- the Volunteer Emergency Worker Credit,
- the Earned Income Credit, and
- Schedule 1299-C, Income Tax Subtractions and Credits (for individuals).
However, the good news is that Jack does not have to make estimated payments if he is 65 years or older and permanently living in a nursing home, or if he is classified as a farmer. (The Illinois Department of Revenue would consider Jack to be a farmer if at least two-thirds of his total federal gross income is from farming.)
If Jack does not qualify for either of these exceptions, then his options to pay his estimated taxes and avoid a penalty are listed below. He can pay any of the following:
- four equal installments, or
- annualized installments based upon the income for each quarter (See Form IL-2210 Instructions, or
- the full amount of tax due on the first installment date.
If Jack chooses to pay four equal installments, his payments are due on the following dates, unless the 15th falls on a weekend or holiday. In that case, the payment will be due on the next business day:
- April 15;
- June 15;
- September 15; and
- January 15 of the following year.
But if Jack uses a fiscal year instead of the calendar year, his first three payments are due on the 15th day of the 4th, 6th, 9th months of his fiscal year, followed by the final payment on the 15th of the first month of the next fiscal year.
Although Jack should have no problem understanding when his payments are due, he needs to be aware that he may be assessed a late estimated payment penalty if he does not pay the required estimated payments on time. But, according to the Illinois Department of Revenue, he may not be subject to the penalty if he pays at least 90 percent of this year's tax or 100 percent of last year's tax in four equal timely installments.
Another matter for Jack to take into consideration when making his payments is that if he plans to file a joint income tax return, he must figure out his estimated tax on the basis of his joint income.
Payments may be made electronically through MyTax Illinois or via mail by using Form IL-1040-ES. For more information, refer to Form IL-1040-ES, Estimated Income Tax Payments for Individuals.
