It can be difficult enough to pay a tax debt, but once penalties are added, the cost can be even higher. However, the IRS provides an option to avoid the additional debt of penalties. Estimated tax payments are geared to those who are self-employed or who own a small business, as they can assist them to spread their tax obligations throughout the year. Working with a tax professional, such as Brian Walsh in Mahwah, NJ, can help you to figure out your quarterly estimated tax payments.
However, below are a few of the facts you need to know about estimated tax payments, including the best way to determine the amount you should be paying.
How to Determine if They Apply to You
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.
Keep in mind that if you answered no to any of these questions, then you will need to 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.
When You Should Use Them
Estimated tax payments are typically made on a quarterly basis. While most individuals who work for a larger business or corporation have taxes withdrawn, self-employed individuals are responsible for both the employer and the employee portion. Therefore, using estimated tax payments can assist you in meeting your tax obligations throughout the year, versus paying a large bill at tax time. You may also find that you have a tax refund coming. Other income that may spur estimated tax payments includes:
However, other sources of income might also trigger the need for estimated tax payments, so work with your tax professional to determine all your income sources.
Determining Your Payment Amounts
The best way to determine your payments is 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 to be sure that you have included everything necessary into 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.
If you choose to not pay the estimated tax payments, then the result could be a tax penalty for underpayment. This will mean writing a larger tax payment to the IRS when you file. The size of the penalty will depend on how much you owe and how long you have owed it to the IRS.
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 Brian Walsh in Mahwah, NJ, who can assist you in determining your payments and when they are due.
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