Means For Making Tax Payment

Everyone, in essence. Individuals whose tax obligation for any year exceeds $1000 need to make payments on those taxes due throughout the year. Most of us do without realizing it. If you are an employee at a regular job, most likely, those taxes are withheld from your paycheck by your employer. If, however, you are an independent contractor, own your own business, or make other money on the side, you are responsible for making those payments.

Four times per year, you must pay estimated taxes on your income and self-employment tax using Form 1040ES. Due dates for these payments are: April 15, June 15, September 15, and January 15. You are supposed to estimate the amount of income you will earn and subsequent taxes you will owe for the entire year. Self-employment tax must be taken into consideration when figuring estimated payments. You need to then pay 25% of this amount each quarter.

Tax software generally figures your estimated taxes based on what you did in previous years. It can also prepare estimated forms for you.

If you are not liable for paying estimated taxes prior to a given due date, but become liable before the next due date, file for the quarter you become liable, but increase your percentage paid.

Dan has a regular job through which taxes are withheld from each paycheck. He begins selling online. During the first part of the year, he is having enough taxes already withheld to cover his online income, as well as his regular income.

In July, however, his online sales spike significantly. He realizes the amount withheld from his regular paycheck will no longer cover his total tax liability. He may file a Form 1040ES by September 15, paying enough to equal a total of 75% (when combined with his regular withholdings) of his estimated tax due without realizing penalties (75% because it is the third quarter).

Dan may also be able to increase the amount he has withheld from his regular paycheck, instead of having to file estimated payments.

If you (and/or your spouse if married filing jointly) has income tax withheld from a paycheck, no estimated taxes are due if the withheld taxes cover more than 90% of the total tax bill for that year - or - if the tax withheld totals more than your entire tax bill from the previous year.

This means if you (or your spouse if married filing jointly) is an employee at another job besides the business, just make sure to have enough tax withheld from each check to cover taxes due from your business income, too. If so, you can forget about making estimated, quarterly payments. In essence, that withholding is paying your quarterly business payments, as well as the taxes due on the other earned income.

IRS Publication 919 will help you compare the total tax to be withheld during the year with the tax you can expect to figure on your return. It will also help you determine how much additional withholding you may need each payday from your regular job in order to avoid owing taxes and penalties for not filing quarterly. To add to the amount withheld from your regular job, you will need to fill out a new W-4 for your employer.

Form 1040ES is a simple payment voucher where you list your names, social security numbers, and address. The only other space on the form is to write in the amount you are paying. Do not forget to include a check. There is a worksheet to help you figure your estimated tax in the instruction booklet for 1040ES.

If you earn under $150,000, quarterly payments must equal 90% of your final income tax bill or at least 100% of the tax bill from last year (amount due before deducting what had already been paid - line 63 of 1040).

If you earn over $150,000, you must pay at least 110% of the tax bill from last year, spread out quarterly, or risk and under-payment penalty.

If you over pay your estimated taxes and expect a refund, you may elect to apply it to the estimated payments for next year.

You could receive a tax penalty if you under pay or miss a deadline. If you are late, you could also end up paying interest on what you owe. Your state may require quarterly payments, as well.

Penalty For The Non Payment Of Taxes

Generally, individuals who do not have sufficient withholdings from their employee wages via Form W-2 are required to make estimated tax payments whenever their tax balance due exceeds 90% of their tax shown on the return. There are several situations where these estimated payments will allow for the taxpayer to avoid penalties for underpayment of taxes. These situations are called "safe harbor rules".

You may owe a penalty for underpayment of taxes if you didn't pay the smaller of the following:

1. Pay at least 90% of your current year tax as shown on your tax return, or
2. 100% of the tax owed on your prior year return (110% if your adjusted gross income for married filing jointly is $150,000, $75,000 for married filing separately)

When preparing your tax return, if you had a balance due, I generally attempt to prepare the estimated tax payments for you using #2 above. If during the year, you see that you will be making less than you did in the previous year, please contact me and we can review your situation and possibly reduce or eliminate your 3rd or 4th quarter payments.

No one wants to put money into the savings bank of the United States Treasury. We'd rather have it to use ourselves. The estimated tax system also works to your advantage when your income increases. As long as you have paid in the smaller of the amounts noted above in #1 or #2, you have until April 15th to pay the balance without incurring a penalty. Doing your taxes early, allows you to know how much you need to pay in April and hold onto the monies until April 15th. With electronic filing, we can set you up with automatic withdrawal from your account on April 15th......thus holding onto the monies until the last minute.