What California Form 540-ES (2016) Is For
California Form 540-ES (2016) is used by individuals to estimate and pay state income tax on money that is not subject to withholding. This includes self-employment income, rental income, interest, dividends, capital gains, and other income where no California tax is automatically taken out. Instead of waiting until you file a tax return in April, the Franchise Tax Board (FTB) expects you to pay tax as you earn the income.
The form package includes a worksheet to estimate your 2016 tax liability and payment vouchers for each installment period. It functions much like the federal estimated tax system but follows California-specific rules, rates, and installment percentages. Using it correctly helps you avoid underpayment penalties and large surprise balances when you file your individual income tax return.
When You’d Use California Form 540-ES (2016)
You use California Form 540-ES (2016) when your withholding will not cover your expected 2016 state tax and you meet the filing requirements for estimated payments. This is common for self-employed taxpayers, landlords, investors, and people with substantial side income in addition to a W-2 job. If you expect to owe at least $500 in tax ($250 if married or RDP filing separately) after withholding and credits, you generally need to make estimated payments.
For 2016, the standard installment schedule required 30% of your annual estimate by April 18, 40% by June 15, 0% in September, and 30% by January 17, 2017. If you missed a due date, you were expected to pay as soon as possible to limit penalties and interest. You adjust payments during the year if your income changes, and you can skip the final January payment by filing your full 2016 Form 540 by January 31, 2017, and paying any balance then.
Key Rules or Details for 2016
Who Must Pay Estimated Tax
You generally must make estimated payments if both apply
- You expect to owe at least $500 for 2016 ($250 if married/RDP filing separately)
- Your withholding will be less than the smaller of
- 90% of your 2016 tax liability
- 100% of your 2015 tax liability
California has special rules for higher-income taxpayers. If your 2015 adjusted gross income exceeded $150,000 ($75,000 if married filing separately), the prior-year safe harbor requires paying 110% of your 2015 tax, not 100%. If your 2016 AGI will be $1,000,000 or more, you cannot use the prior-year safe harbor at all and must pay at least 90% of your 2016 tax.
Installment Percentages and Special Groups
Unlike the federal system’s equal 25% quarters, California front-loads estimated tax. For 2016, required installments were 30% in April, 40% in June, 0% in September, and 30% in January. This schedule affects how the underpayment penalty is computed, so paying 25% each quarter can still lead to penalties.
Farmers and fishermen with at least two-thirds of their gross income from those activities may make a single estimated payment by January 17, 2017. This one-time payment can satisfy the requirement if it covers the necessary percentage of their annual income tax liability.
Mandatory Electronic Payments and Methods
If any estimated payment exceeds $20,000 or your total California tax liability for the year exceeds $80,000, you must pay electronically. Failing to use an electronic method when required triggers a 10% penalty on that payment. You can pay by
- FTB Web Pay
- Credit card (with a convenience fee)
- Check or money order with a voucher, if you are not subject to the e-pay mandate
Step-by-Step (High Level)
Step 1: Estimate Your 2016 Income
Use the worksheet in the 2016 Form 540-ES instructions to estimate your California adjusted gross income. Include wages, self-employment, rental income, dividends, capital gains, and other taxable income. Subtract anticipated adjustments, then apply the correct standard or itemized deduction and any exemptions to find your estimated taxable income.
Step 2: Compute Your Estimated Tax Liability
Apply California’s 2016 progressive tax rates, which range from 1% to 12.3%, plus the 1% Mental Health Services Tax on taxable income over $1,000,000. Add any Alternative Minimum Tax if it applies to you. Subtract estimated credits, such as dependent exemption credits or other state credits, to arrive at your total estimated 2016 income tax.
Step 3: Determine How Much Must Be Paid via Estimates
Subtract expected California withholding from your estimated tax liability. If the remaining amount is at least $500 ($250 if married filing separately) and meets the safe harbor tests, you must make estimated payments. Compare 90% of your 2016 estimate with 100% (or 110% for high-income) of your 2015 tax and use the lower requirement to plan payments and limit underpayment penalties.
Step 4: Apply the 30–40–0–30 Schedule
Take your required annual payment and allocate it using California’s installment percentages. Pay 30% by April 18, 2016, 40% by June 15, 2016, nothing in September, and 30% by January 17, 2017. If you adjust your estimate midyear, recalculate the remaining installments rather than amending past payments.
Step 5: Make Payments and Track Them
Submit payments using Web Pay, credit card, or check with the correct voucher from Form 540-ES. Keep records of confirmation numbers, bank statements, and copies of vouchers. These will be needed when you file a tax return and report total estimated payments on your 2016 Form 540.
Common Mistakes and How to Avoid Them
- Using equal 25% installments instead of 30%, 40%, 0%, 30%
- Ignoring the 110% rule when 2015 AGI exceeded $150,000
- Relying on the prior-year safe harbor when 2016 AGI will exceed $1,000,000
- Mailing a large check instead of paying electronically when over the $20,000 or $80,000 thresholds
- Forgetting to include the 1% Mental Health Services Tax or Alternative Minimum Tax in the worksheet
- Overlooking the option to increase W-2 withholding instead of making quarterly vouchers
- Not using annualized income methods when income is highly seasonal or fluctuates
What Happens After You File
When you submit estimated payments, the FTB credits them to your account under your Social Security number or ITIN. You can confirm that payments posted correctly by checking your MyFTB account. These estimated payments are later reported on your 2016 Form 540 and applied against your actual state income tax liability.
If you overpay, the extra amount becomes a refund or can be applied to your 2017 estimated tax. If you underpay, you will owe the balance plus any penalties and interest. The FTB computes many underpayment penalties using Form 5805, and often calculates the penalty automatically when you file a tax return. You may need to file Form 5805 yourself if you are claiming an exception or using annualized income to reduce the penalty. Keep payment records and worksheets for at least four years, since the FTB generally has that long from the original due date to assess additional tax or review your account.
FAQs
Do I need estimated payments if I already have W-2 withholding?
Maybe. If you have substantial side income such as freelance work, rentals, or stock sales, your withholding may not cover your full tax liability. Estimate your 2016 income tax and compare your withholding to the safe harbor rules to decide whether to make estimates or adjust your W-2 withholding.
What happens if I completely skip estimated payments?
You will still file a tax return and pay your full 2016 income tax by April 2017, but you may owe an underpayment penalty. The penalty works like interest on the amounts that should have been paid each installment period, running from each due date until you pay. The FTB usually calculates this for you and sends a bill.
Can I change my estimated payment amounts during the year?
Yes. Your initial calculation is only a projection. If your income or deductions change, recalculate your estimated tax and adjust remaining installments. Increasing or decreasing later payments helps you stay closer to 90% of your final liability and avoid underpayment penalties.
Why is there no third-quarter payment for California estimated tax?
California law sets a 30–40–0–30 schedule instead of four equal quarters. The state wants more income tax paid earlier in the year, so the September installment is effectively built into the larger April and June payments. You still must follow these percentages for each period when the FTB checks for underpayment.
Should I base my 2016 estimates on my 2015 income tax?
You can, but you need to follow the safe harbor rules. If your 2015 AGI was under $150,000, paying 100% of your 2015 tax through withholding and estimates avoids the underpayment penalty, even if your 2016 income is higher. If 2015 AGI exceeded $150,000, you need 110% of your 2015 tax, and once 2016 AGI hits $1,000,000, you must pay 90% of your 2016 liability instead of relying on a past due return safe harbor.
