Are you one of the many taxpayers who still need to make an estimated tax payment for 2024 for you or your business? The good news is you are not alone – but there are still crucial considerations for you to maintain compliance and avoid unnecessary IRS challenges.
What are common issues with estimated tax payments?
Quarterly estimated tax payments are made by individuals or businesses to the Internal Revenue Service (IRS) for federal withholding throughout the year on a quarterly basis. For those taxpayers who still plan to make their final payment to reduce or avoid the penalty for underpayment of estimated tax, it is crucial that the payment is applied to the correct tax year. For example, the final estimated tax payment for the 2024 tax year was due Jan. 15, 2025. Many will utilize one of the IRS’s online payment options, including the Electronic Federal Tax Payment System (EFTPS), to make an electronic payment. The systems have pre-populated fields the user must select to instruct the IRS how to apply the payment. Given the past due date for 2024 estimated tax payments, the system will automatically default to the tax year 2025 when selecting “Estimated Tax Payments.” While this may not seem like a big deal, it could be a costly and frustrating mistake for some taxpayers if not corrected.
When an estimated tax payment is made for a tax year, the funds are held for that specific tax year and cannot be transferred or allocated to a different tax year until a tax return is filed for that year. That means if you intend to make your final estimated tax payment for 2024, but it is entered as a 2025 estimated tax payment, you will not see the benefit of those funds until April 2026 or whenever you file your 2025 tax return.
This common oversight often leads to frustrated taxpayers who intended to wrap up their 2024 tax payments but instead find themselves receiving past-due notices for 2024 unpaid balances, including estimated tax penalty for failure to pay enough tax by the due date. Many taxpayers might contact their tax advisor looking for IRS assistance to simply move the funds from 2025 to 2024, but to their surprise, they learn the IRS has no authority to reallocate estimated tax payments until the following year when the year is closed and the return is filed. This means that once a payment is designated as an estimated tax payment, it cannot be transferred to another tax year until that tax year is in compliance with a filed return.
How can I make sure my estimated tax payment does not default to the wrong tax year?
Regardless of intent, an estimated tax payment submitted to the IRS may not be considered an overpayment until the close of the current tax year and the actual amount of tax due or overpaid has been determined. Since the IRS does not have the authority to transfer the estimated payment until that time has occurred, it is important to double-check online payment details, particularly by selecting a balance due payment option and entering “2024” instead of the “Estimated Tax Payment” option, which defaults to 2025. If you have questions or concerns about your required estimated tax payments, contact your Windham Brannon tax advisor today, or reach out to Tomika Bullet.
