The year is flying by, and so is your chance to verify that your income tax payments are up-to-date and avoid a penalty when you file your return. We all like getting paid on time, and so do the IRS and state tax agencies.
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.
What the Required Payments?
If you owed additional tax for 2014, you may have to pay estimated tax for 2015. In most cases, you must pay estimated tax for 2015 if:
(1) You expect to owe at least $1,000 in tax for 2015, after subtracting your withholding and refundable credits. AND (2) You expect your withholding and refundable credits to be less than the smaller of 90% of your 2015 tax liability or 100% of your 2014 tax liability.
What Are the Penalties?
Penalties are assessed if you do not make the required payments throughout the year, as income is received. Required payments are calculated based on the tax due for income received during each calendar quarter. Penalties are in the form of interest applied to the underpaid amount, accrued daily from the date it was due and until it is paid. Interest rates are adjusted periodically. As of July 1, 2015, the IRS’ interest rate on individual taxpayer underpayments was 3%.
What Should You Do?
Clearly, the IRS and other taxing agencies are serious about wanting their money on time. You can figure out your 2015 federal income tax bill by using the IRS Withholding Calculator, found at http://1.usa.gov/18lMbRu. More federal tax information is contained in IRS Publication 505, “Tax Withholding and Estimated Tax,” found at http://1.usa.gov/1Unszm9. Each state and the District of Columbia have information about withholdings, estimates, and underpayment penalties on its website.
When in doubt, or if you are not comfortable with DIY tax preparation, consult a qualified tax professional.