Navigating Quarterly Taxes as an Australian Expat in the US
Learn the purpose of the quarterly tax system, how it works, and its relevance to Australian Expats in the US.
Quarterly Tax System
A method used by the United States government to collect income taxes from individuals and businesses on a more frequent basis throughout the year.
It ensures that taxpayers who do not have taxes withheld from their income still meet their tax obligations on time.
Estimated Tax Payments
Taxpayers who expect to owe a certain amount of tax for the year are generally required to make estimated tax payments quarterly, rather than in a single lump sum at the end of the tax year.
This includes self-employed individuals, freelancers, independent contractors, and others who receive income not subject to withholding (i.e., not from an employer).
Australian expats who receive cash bonuses, stock grants (RSUs), exercise stock options (ISO, NSO), or have other passive income streams, are affected by this requirement as their employers often do not withhold enough. See our guide on Bonus & RSU shortfalls for more details.
Frequency of Payments
Estimated tax payments are made on a quarterly basis, meaning four times a year. The due dates for these payments are typically April 15, June 15, September 15, and January 15 of the following year. If any of these dates fall on a weekend or holiday, the due date is shifted to the next business day.
Calculating Estimated Tax
To calculate the amount for each quarterly payment, taxpayers typically estimate their total tax liability for the year and divide that amount by four to determine the amount due for each quarter. For joint filers, this would mean combining both spouses’ incomes and calculating the tax on the total sum. A helpful tool like Smartasset can assist with this calculation, although it’s essential to factor in additional self-employment taxes.
Various methods can be used to estimate taxes, but common approaches include using the previous year's tax return as a starting point or projecting current-year income and deductions.
Payment Methods
Taxpayers can make estimated tax payments in several ways:
Electronically through the IRS's Electronic Federal Tax Payment System (EFTPS)
Credit or Debit Card
By mail using payment vouchers provided by the IRS
The same approach applies at the State level for those residing in a state with state income taxes. Keeping track of these payments is crucial for seamless tax return preparation.
Exceptions
Certain individuals and businesses may be exempt from making estimated tax payments or may have different rules for payment frequency. For example, employees who receive wages subject to withholding typically do not need to make estimated tax payments because their taxes are withheld by their employer.
Underpayment Penalties
Taxpayers who fail to make sufficient estimated tax payments throughout the year may be subject to an underpayment penalty. To avoid this penalty, taxpayers generally must pay at least 90% of their current year's tax liability or 100% (110% for high-income taxpayers) of their previous year's tax liability, whichever is lower, through a combination of withholding and estimated tax payments.
Conclusion
Understanding the quarterly tax system is essential for Australian expats in the US to ensure timely and accurate tax compliance. With income streams from both Australia and the US, it becomes even more crucial for Australian expats to engage an international tax accountant who can provide expert guidance in calculating their quarterly taxes. Proper estimation and timely payment of quarterly taxes not only fulfills tax obligations, but allows for more efficient cash flow management. By staying well-informed and proactive, Australian expats can confidently navigate the intricacies of the US tax landscape, ensuring financial ease and peace of mind.