What Happens If You Overpay Estimated Taxes To IRS?

Ines Zemelman, EA
Ines Zemelman, EA
• 07.11.22 • 3 mins read
What Happens If You Overpay Estimated Taxes To IRS?

It takes a lot of experience and knowledge to file your taxes as a freelancer or independent contractor. Quarterly estimated taxes are frequently a source of confusion for freelancers or independent contractors.

When you're just starting out, how can you figure out how much money you'll make? Paying too little is probably a bad idea. What about paying too much? Could that also be a problem?

Are There Penalties For Overpaying Your Taxes?

What happens if you overpay estimated taxes?

Overpayment of your tax bill is not subject to penalties. Don't worry if you overpaid: the Internal Revenue Service (IRS) won't take anything from you. The amount of your overpayment will instead be refunded to you.

Estimated tax overpayment for quarterly taxes is one of the ways to do this. The same is true if you withheld too much from a W-2 paycheck.

The downside to overpaying estimated taxes is that the IRS retains your funds for most of the year. Essentially, you're lending IRS money.

So, Are There Any Penalties?

The difference between overpaying and underpaying is that overpaying is fine, underpaying is not.

You could end up paying some steep penalties for underpayment, as well as having to pay interest on the money you owe.

How Do I Know If I Overpaid?

Do you get a notification if you overpay?

Overpayment of estimated taxes or too much tax withholding from your paycheck will not result in the IRS notifying you.

If you are filing your Form 1040 income tax return, you will generally figure this out on your own. At that point, you can request an estimated tax overpayment refund of the extra money.

In the event that you overpay taxes, you won't get a notice, but the IRS may contact you if you miss out on tax credits.

Some credits are automatically verified by the IRS system. The notice will be sent to you if you are found to qualify for the credits but have not claimed them.

What Overpaying Means For Your Estimated Taxes

IRS overpayments can be applied to next year's taxes in full or in part. As long as you use all of the overpayment to offset your estimated taxes, the rest of the overpayment will be applied to your second installment of estimated taxes, and so on until all the overpayment is applied.

Who Must Pay Estimated Quarterly Taxes?

If you do not have anyone withholding taxes for the year, but you owe more than $1,000, you should pay quarterly estimated tax payments.

Income from any source other than a regular, W-2 job is subject to the above rule. Some of the people it applies to are:

  • Contractors, including freelancers;

  • Gig economy earners (like Uber drivers and Airbnb hosts);

  • Authors;

  • House or pet sitters;

  • Small business owners.

There will be an underpayment penalty charged if you don't pay the mandatory payments you're supposed to pay. 

You will not be subject to penalties if you underpay taxes this year given that you did not owe taxes last year! However, payments will need to be made going forward.

Overpayment Of Taxes Applied To Next Year

If you have overpaid tax this year, have you ever wondered what would be the advantage of yours to use the following year? 

The money that you receive as a tax refund this year can be credited toward your taxes the following year if you're receiving a refund.

What if you overpay estimated taxes?

There is no requirement that you apply your overpayment of taxes to the next year's taxes, but it is a good idea to do so as you can get a head start on the next year's tax preparations by doing this now.

Mainly if your income is not a subject to withholding, this may be helpful. In the case of independent contractors, you may need to pay estimated taxes every quarter if your taxes aren't withheld through Form W-4 instructions.

Setting aside money for estimated tax payments may be a bit more difficult for some people. You can reduce the amount you need to set aside if you apply your overpayment of taxes to next year.

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Keeping Money To Yourself

As a general rule, though, one should always make sure to be calculating taxes accurately - especially when they are making quarterly payments to the IRS. It will ensure that you will never overpay, and you will ensure that the IRS will not be able to hold onto the money you have saved.