Do You Need to Make Estimated Tax Payments?

For those who have moved into the world of self-employment or business ownership, there is a question of how to handle paying their taxes. After all, in a traditional employer setting, the taxes owed for income earned are withdrawn from our paychecks. In a self-employment setting, that does not occur. So how can those taxes be properly paid to the IRS without occurring penalties? The answer is in the form of estimated tax payments. Working with your tax professional or accountant, such as O'Brien in Farmingda,e, NJ, who can assist you in determining the amount of your estimated tax payments based on your unique situation.

Below are just a few tips to assist you in understanding how estimated payments work and the best way to determine how much to pay and the due dates for those payments.

Determining Your Eligibility

Here are a few questions that can help you to determine if you need to make estimated tax payments. Keep in mind that if you are self-employed, the answer is going to be no, as you have no other method of making tax payments. However, there are situations where you may be employed full time but still need to make those estimated tax payments. For example, if you choose to have a second job, such as freelancing or providing another service, then you may have to make estimated tax payments to cover that additional income on your tax return.

• Do you expect to owe less than $1,000 in taxes for the tax year, after you have subtracted your federal income tax withholding from your total tax bill? If the answer is yes, then you probably do not need to make estimated tax payments.
• Do you expect that your income tax withholding will be at least 100 percent of the tax on your previous year’s return or your adjusted gross income was over $150,000, then do you expect your income withholding to be at least 110% of the tax you owed in the previous year? If yes, then you will probably not need to make payments.
• Do you anticipate your federal income tax withholding to amount to at least 90% of the tax you will owe for this tax year? If yes, then you should not need to make payments.

If you answered no to any of these questions, then you should make estimated tax payments with a Form 1040-ES. To avoid a penalty, your total tax payments must satisfy one of the situations outlined above.

The safest option will always be to aim for 100% to be sure that you meet all your necessary obligations and can avoid any penalties for underpayment of taxes. If you meet any of these requirements, it typically will mean that you will not incur the penalty, regardless of how much tax you do end up owing.

Making Your Payments

Estimated tax payments are typically made on a quarterly basis. Therefore, using estimated tax payments can assist you in meeting your tax obligations throughout the year, versus paying a large bill at tax time and incurring penalties as a result. Other income that may spur estimated tax payments includes:

• Dividends
• Interest income
• Sales of stock and assets that resulted in gains
• Business earnings
• Alimony

Work with your tax professional to determine all your income sources, thus confirming that estimated payments are made on all your income.

To determine your payment amounts, use the copy of the worksheet that accompanies the 1040-ES and follow the instructions. However, your previous year’s tax return will also be a helpful resource to determine all your sources of income and deductions that are needed to complete your worksheet.

Also be sure to record any previous payments. In addition, you may want to consider having any tax refund put toward your tax obligation for the next tax period.

Estimated taxes are typically paid in four equal quarterly installments. There are some cases where unequal payments could occur, but only if you don’t figure your quarterly payments out until April, as your first one will then be higher. If you overpaid in the previous year, you may have a credit that lowers one of your payments. Another consideration that may alter your payments is if you make a larger amount of money in one quarter over another.

As you can see, estimated payments require some work, but they can be helpful in avoiding future penalties when you file your return.

Click on the link below to contact one of the professionals at Coastal Business Services, LLC in Farmingda,e, NJ, who can assist you to find out how much your estimated payments need to be for the upcoming tax year.