|
|
Whenever estimated taxes are mentioned, most people tend to think of small businesses or the self-employed, but the fact is that any kind of income that is not subject to withholding taxes may be subject to estimated tax payments. Whether the untaxed money comes from a job, investments, alimony or prizes, the IRS is demanding taxes owed, based on the well-known “pay-taxes-as-you-earn” principle that the tax system is based on.
|
|
The Internal Revenue Service has set up a timetable, calling for estimated tax payments four times a year. Although the payments are commonly called quarterly, they don't coincide with calendar quarters.
|
|
|
|
The four estimated tax payments are generally due each year on the 15th of April, June, September and January. But if that date falls on a weekend or federal holiday, the 1040-ES filing deadline is pushed to the following business day.
|
|
|
|
The IRS recommends that you figure the total estimated tax for the entire year, divide it by four and send in equal payments according to the schedule. There's a work sheet with the Form 1040-ES package or as part of your tax software to do it.
|
|
In most cases, you must make estimated tax payments if you expect to owe $1,000 or more in taxes for the year over the amount withheld from your wages (if any). In the following cases, though, the $1,000 trigger point doesn't matter.
|
|
|
- If your prior year Adjusted Gross Income was $150,000 or less, then you can avoid a penalty if you pay either 90% of this year's income tax liability or 100% of your income tax liability from last year (dividing what you paid last year into four quarterly payments). This rule helps if you have a big spike in income one year, say, because you sell an investment for a huge gain or win the lottery. If wage withholding for the year equals the amount of tax you owed in the previous year, then you wouldn't need to pay estimated taxes, no matter how much extra tax you owe on your windfall.
|
|
- If your prior year's Adjusted Gross Income was greater than $150,000, then you must pay either 90% of this year's income tax liability or 110% of last year's income tax liability.
|
|
The penalty for making estimated tax payments late is much more lenient than the penalties for paying yearly taxes late.
|
|
|
| The government charges interest from the date the taxes were due until the date the taxes are paid. The "failure to file" and "failure to pay" penalties associated with long-term tax debts are not assessed. |
|
|
|
The interest charged is at a rate of 3% above the federal prime rate for underpayment of estimated taxes.
|
|
|
If your total outstanding tax liability is less than $1,000 at the end of the tax year, you do not have to pay any penalties for underpaying estimated taxes.
|
|
The penalty may also be waived if:
|
- The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
- You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.
|
|
|
|
|
|
|
|
You do not have to pay estimated tax for the current year if you meet all three of the following conditions.
|
|
|
- You had no tax liability for the prior year;
|
|
- You were a U.S. citizen or resident for the whole year;
|
|
- Your prior tax year covered a 12 month period.
|
|
For estimated taxes, use Form 1040-ES, Estimated Tax for Individuals. As mentioned above, the form includes a worksheet to help you determine your estimated tax.
|
|
| If you are filing as a corporation you should use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. |
|
|
If you are filing as a corporation you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.
|
|
You may pay online or by phone. You may also pay by check or money order, or by credit or debit card.
|
|
| If you mail your payments to the IRS, use the payment vouchers that come with Form 1040-ES. If you pay by check, make sure to make it payable to the United States Treasury, write your SS number and the year for which you are paying. |
|
|
After you start paying estimated taxes, be sure to keep a separate record of the dates you paid them and how much you sent for each period. If you don't keep accurate records, it can take you longer to prepare your income tax return, and you may miss one or more of the payments you made. If you pay estimated taxes, be sure to claim credit for them when you file your income tax return.
|
|
| If you are employed but have income from other sources as well (such as income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards) you can always adjust your income tax withholding to cover the additional taxes for the other sources of income. |
|
| There are two different ways that you could adjust the withholding figures. One is to adjust the number of withholding allowances. The other is to indicate an additional dollar amount to withhold each paycheck. |
|
| Unless you live in one of the states that don’t have income taxes, don’t forget to make state estimated taxes too (you can get forms and vouchers for state payments as well). |
|
As always, we recommend that you rely on professional advice to make sure you don’t underpay or overpay your taxes, estimated and otherwise.
|
|
|
|
