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.
