Tag: estimated tax

Need to Pay Estimated Income Taxes?

The IRS requires taxpayers to pay their income tax liability as their income is earned. States that charge income tax and the District of Columbia have similar rules. Employers withhold and remit income taxes to cover their employees’ tax liability on wages and other compensation. Job done. But taxpayers with non-compensation income like interest, dividends, capital gains, prizes and awards may have to make estimated tax payments to cover the related income tax liability.

Taxpayers with profits from self-employment must regularly assess their need to make estimated income tax payments, as well as other taxes such as the self-employment tax. “Regularly” means at least quarterly. All the necessary details about making payments, when and how much are at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes. 

It’s a lot to read, so let’s boil it down to three important things to know:

  1. When are Estimated Taxes Due?

For estimated tax purposes, the year is divided into four quarters. Although some payment due dates changed temporarily due to COVID, estimated tax payments are generally due on April 15, June 15, September 15, and January 15 of the following year. If the payment due date falls on a Saturday, a Sunday, or a legal holiday, the payment is due the next business day.

  1. How Much Do You Need to Pay?

Estimated tax payments are based on estimated income and resulting tax liability. An estimated tax payment is due if the liability is at least $1,000, after subtracting withholding and refundable credits. Withholdings or estimated payments must equal or exceed the smaller of 90% of your 2021 tax liability, or 100% of your 2020 tax liability. Calculate your 2021 tax liability at this link https://www.irs.gov/forms-pubs/about-form-1040-es. 

  1. What if You Don’t Pay Enough?

Interest is due on any unpaid balance, accrued daily from the time the tax liability was created (i.e., by receiving income) until the tax is paid. Interest accrues daily, which can really add to your tax bill. Clearly, the IRS is serious about getting paid on time. Figure your 2021 federal income tax bill by using the IRS Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator.

Taxpayers who paid a lot when filing their 2020 income tax return and those who receive income with no tax withholdings should look at whether 2021 estimated income tax payments are needed. The IRS has all the tools to figure it out at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.

Time to Think About Estimated Income Taxes — Again

Labor Day marks the unofficial end of summer. So does the September 15th deadline for individuals to pay their third quarterly estimated income tax payments for 2019.  That’s right; those tax payments are due before your sun tan fades. The sad news is, the IRS and state tax agencies want you to pay your taxes as income comes in.

Estimated tax payments are due April 15, June 15, September 15, and January 15, unless, those dates fall on a weekend or a holiday. Technology makes the process a little less painful, with various online payment options. Of course, the IRS and state tax agencies still take checks. Some options, like credit cards, add service fees.

Three things to know about estimated tax payments:

Who Needs to Pay Estimated Taxes?

If all of your income comes from wages, the taxes that your employer withholds and remits for you probably cover your income tax liability. (More on withholdings later.) If you are self-employed or receive investment or rental income, you should check whether you need to make estimated income tax payments. The IRS website explains how to see if estimated payments apply to you and how to estimate federal income tax at this link

How Much Do You Need to Pay?

Estimated tax payments are based on your estimated income and tax liability. To avoid underpayment penalties, pay estimated taxes if you expect to owe at least $1,000 in tax after subtracting withholding and refundable credits. Total withholdings and estimated payments must equal or exceed the lesser of 90% of your current year tax liability, or 100% of your prior year tax liability. Figure your 2019 federal income tax bill with the IRS Withholding Estimator – https://www.irs.gov/individuals/tax-withholding-estimator.

What if You Don’t Pay Enough?

Interest is calculated on the unpaid balance due, accrued daily from the time the tax liability was created (aka when your income was earned or received) and when it is paid. Daily interest accruals can really add to your tax bill, so staying on top of your income tax payments is important. Annualized interest rates charged vary with market rates. At this writing, the IRS accrues 5% annual interest on unpaid individual income tax balances. Clearly, the IRS is serious about getting paid on time. 
If you paid a lot when you filed your 2018 income tax return or have income from which taxes are not withheld, use the links above to see if you need to make estimated tax payments for 2019. Don’t feel comfortable doing this yourself? The IRS can also help you find a qualified tax professional – here https://www.irs.gov/tax-professionals/choosing-a-tax-professional.

Need 2018 Estimated Tax Payments?

Phew! Tax season 2018 is over! So how did it turn out? Did you have to pay when you filed your 2017 returns? Do you know if you are withholding or paying enough for 2018?

 

April is a good time to check on what you are projected to owe for your 2018 taxes and see if it’s enough, or too much. That’s especially true this year because of the new tax law and changes to employer withholding tables. Word on the street is that the IRS was really aggressive in decreasing employer withholdings in order to increase paychecks. That can make employees feel rich now, but it could bite them hard when their 2018 tax returns are due.

 

If all your income comes from wages, chances are that your tax withholdings will cover your income tax liability. But if you are self-employed or receive other income, such as interest, dividends, capital gains, or rent, you might need to make estimated income tax payments. On top of that, if you don’t pay enough of your taxes on time, you could get hit with interest and penalties.

 

What the Required Payments?

If you owed additional tax for 2017, you may have to pay estimated tax for 2018. Estimated payments should be made if:

 

  • You expect to owe at least $1,000 in tax for 2018, after subtracting your withholding and refundable credits.

AND

 

  • You expect your total withholding and refundable credits to be less than the smaller of 90% of your 2018 tax liability or 100% of your 2017 tax liability.

 

What Are the Penalties?

Penalties are assessed if the required payments described above aren’t made as income is received, at least quarterly. Interest penalties are assessed on the underpaid amount, accrued daily from the date it was due and until it is paid. Interest rates are adjusted periodically and daily accruals really add up.

 

What Should You Do?

Clearly, the IRS and other taxing agencies are serious about wanting their money on time. You can figure out your 2018 federal income tax bill by using the IRS Withholding Calculator, updated for the new tax law – . People who are self-employed or have investment income should check out the IRS web page about tax estimates.

 

When in doubt, or if you are not comfortable with DIY tax estimates, be sure to consult with a qualified tax professional. She or he will help you identify all the information needed to project your 2018 tax liabilities, pay enough taxes on time, and avoid interest penalties.