Estimated tax is the method some employers use to pay income taxes. When paying income taxes, there are two methods allowed by the IRS; the withholding method or, you guessed it, the estimated method. Estimated tax can be used to pay different types of income taxes; these taxes include any income from dividends, self-employment, alimony, rent, interests or gains acquired from awards, prizes or the sale of assets. Employed individuals may also need to pay estimated tax, if the amount of money being withheld from their salary isn’t enough. This includes money being withheld from pension and other sources of income as well.
Estimated tax does not only cover income tax, it may also cover self-employment tax and any other taxes you must file on your returns. If the amount you pay in your taxes, whether, through the process of withholding or estimated taxes, you may be charged a penalty; therefore, it is always wise to check your returns thoroughly or have a professional Miami tax preparer do it for you.
What is the process for paying Estimated Tax?
Individuals and businesses must use different forms to file their estimated taxes. If you are filing your estimated taxes as a self-employed individual, partner, sole proprietor, or an S Corporation shareholder, you must file Form 1040-ES, Estimated Tax for Individuals to determine how much you must pay and to make the payments as well.
All corporations must file Form 1120-W, Estimated tax for Corporations. The Electronic Federal Tax Payment System is used to make deposits and pay your estimated taxes.
Who is required by law to pay estimated taxes?
Once you file your taxes as a partner, sole proprietor, and self-employed individual or S corporation and believe you will owe the IRS $1000 or more when your tax is filed, you must pay estimated taxes.
All corporations make estimated tax payments for the business, once you believe you will owe $500 or more when you file your returns.
Individuals with a tax liability from the previous year may need to pay estimated tax for the current tax year. To determine if your liability is eligible for an estimated tax payment, use Form 1040-ES.
Who is exempted from paying estimated tax?
Salary workers can speak to their employers to determine if enough tax is being withheld to cover your annual income tax returns. If the company is not taking enough, ask your employer to withhold more tax from your earnings. To properly comply with the tax laws, file Form W-4 with your employer. Form W-4 has a special line requesting the additional amount you want your employer to withhold.
You will also be exempted from estimated tax for the current tax year, if you meet all three conditions below:
· You were a U.S. resident or citizen for the entire tax year.
· You have no prior tax liability – if your total tax was nil or you were not required to file an income tax return, then you do not have a tax liability.
· Your previous tax year covered a 12 month period.
If you are a fisherman or a farmer, your estimated tax requirements are different and you should consult STEVENSON TAX & ACCOUNTING, INC. for valuable information on how to proceed with filing your taxes.
When should you pay estimated tax?
Individuals or businesses paying estimated taxes must pay them quarterly. There is a specific due date for each quarter; however, if the full estimated amount is not paid by the specified due date, you can be charged a penalty even if you are expecting a refund when you file your estimated taxes.
The Electronic Federal Tax Payment system, EFTPS is the easiest and fastest way to pay your estimated taxes. To avoid paying less than you should, it is easier to make payments on a weekly, bi-weekly or monthly basis. By using the EFTPS payment method you will have access to your payment history, which is a good way to keep track of your payments and know how much you still owe.
What happens if you underpay your taxes?
If you do not pay enough to cover your taxes, whether, through withholding or estimated tax, you may have to pay a penalty for underpayment of taxes. You may avoid a penalty being levied on you if you owe $1000 or when the withholding process is used or you paid 90% or more of the estimated taxes for the current period or the full amount of the estimated tax for previous years.
To avoid underpayments and such penalties, review your taxes carefully or hire a professional to help you with them.
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