When Ross, age 62, retired from his full-time job in August, he continued to work as a freelance consultant. During all the years he was employed, Ross typically received a bi-weekly paycheck, from which taxes, insurance premiums, and 401(k) contributions were automatically deducted.

But once Ross went off on his own, he began getting paid on a 1099 basis. This meant he was receiving payments for the exact amount on his invoices, with no taxes or other deductions taken out. It was up to Ross to pay taxes on that income himself.

Ross was fine with paying the taxes on his own at a later date. He had always been prudent about saving and planned to put aside an adequate portion of his freelance consulting income to cover what he would owe when tax time rolled around the following April. However, what Ross failed to account for was the requirement, for those who receive 1099 income and others, to pay quarterly federal and state tax estimates for the year ahead.

When Ross went to his accountant the following April, it turned out that, in addition to paying taxes he was also going to have to pay a tax penalty for neglecting to make estimated payments throughout the year.

Don’t be like Ross.

It’s not uncommon for individuals to continue to work, perhaps in a different capacity or on a part-time basis, after they have retired from their full-time job. Many of our clients enjoy using their years of experience and knowledge to maintain an income stream and keep busy. But for those who used to benefit from the convenience of their employer’s payroll management, the estimated tax requirements of self-employment can come as a surprise.

It’s also important to keep in mind that quarterly estimated tax payments aren’t only for the self-employed. There can be many other reasons why one may need to pay estimated taxes.

Here are some common questions Modera advisers are asked about estimated tax payments:

How do I know if I have to pay estimated quarterly taxes?

The federal income tax (as is most state income taxes) is a “pay-as-you-go” tax. You must pay the tax as you earn or receive income during the year. There are 2 ways to pay, through tax withholding or estimated tax payments.

If you receive income from sources such as capital gains on an investment or real estate, interest, dividends, rental property, self-employment, unemployment, prizes, awards, or alimony, you may be required to make estimated tax payments. This is not a complete list, so be sure to consult with your accountant.

I’m employed at a company, and taxes are withheld from my paycheck. Does this mean I don’t have to make any estimated tax payments to avoid penalties?

It depends. To avoid penalties, you must pay estimated tax if your withholding is expected to be less than the smaller of 90% of your current year tax liability or 100% of your previous tax year’s tax liability (110% if your adjusted gross income exceeded $150,000 in the previous tax year for married filing jointly or $75,000 if married filing separately).

If you do receive income from one or more of the categories listed above (where income tax is withheld) you may already have enough taxes withheld from your paycheck. We recommend speaking with your accountant to determine if your paycheck tax withholdings are enough to cover your estimated tax requirements for the year. If it is not enough, you can choose to increase your withholding or pay estimated taxes to avoid a penalty.

I receive Social Security and a pension that have taxes withheld. Am I exempt from paying estimated taxes?

You would not be exempt from estimated tax payments, if your tax withholdings are less than the smaller of 90% of your tax liability or 100% of your previous year’s tax (110% if your previous year’s adjusted gross income exceeded $150,000 or $75,000 if married filing separately.).

How do I know how much I’ve received in investment income each year?

For many taxable investment accounts, total income for the year cannot be accurately estimated until late December when investment fund dividend distributions are traditionally made. This can make it difficult to accurately estimate your tax payment requirement.  Using the prior year’s 1099s may be the best initial estimate of your investment income. Updated estimated tax liability calculations should be made towards the close of the year when investment funds communicate estimates of their taxable fund distributions.

When are estimated quarterly tax payments due?

The due dates are April 15, June 15, September 15 and January 15. If the estimated tax payment due date falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that’s not a Saturday, Sunday, or legal holiday.

I recognized a large capital gain during the year. Do I have to worry about payment of estimated taxes on the gain?

Yes; if you recognize a large capital gain, you should determine whether estimated tax payments would be due on the next estimated payment tax due date.  Consult with your accountant to determine the estimated tax payment due.

My spouse works full-time for a company and has income tax withheld from each paycheck. However, I receive freelance income, so taxes are not withheld. We file taxes jointly. Instead of paying estimated taxes, can’t my spouse just have more withheld from his paycheck to cover what I would owe, too?

That strategy may work, depending on the amount of tax you owe on your freelance income. But even if your spouse’s withholding doesn’t cover the full amount, it may help to lower your estimated tax bill.

I receive freelance income from two states. Do I have to pay estimated taxes on income from both states?

The short answer is maybe – depending on where you live. In some cases, you will pay estimated taxes to both states but receive a credit in the tax return of the state where you reside for all or a portion of the taxes paid to the other state.   Again, it’s important to consult with an accountant to determine the amount of your estimated tax payments.

What if I don’t want to be bothered with paying quarterly estimated taxes. Can’t I just catch up on April 15?

You could, but you will probably pay a penalty if it turns out you owed the IRS money at the end of previous year. In 2019, the interest rate for underpayments by individual taxpayers is six percent.

If you don’t want to have to remember to pay quarterly estimated payments, another option is to pay the full estimated amount in April when you file your prior year tax returns. You will be letting the government get your money in advance (which means you won’t be earning any interest on it), but you won’t have to worry about being penalized.

What if I miss a quarterly payment?

Let your accountant know as soon as possible. Missing an estimated payment may result in a penalty.

The Bottom Line

Estimated tax requirements can be complex, particularly for those whose financial lives have multiple sources of income. Modera recommends you connect with your accountant to ensure you’re paying the right amount of estimated taxes in a timely manner to avoid penalties.

Modera Wealth Management., LLC is an SEC registered investment adviser with places of business in Massachusetts, New Jersey, Georgia, North Carolina and Florida. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements.

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This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.