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.
Sunday, March 16, 2008
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.
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.
Monday, February 25, 2008
Payroll Tax Payments made In Time
Many business owners don’t realize how important it is to get payroll tax payments made on time. If a late payment is made, once the IRS catches up to it, the penalties are quite stiff: 10% off the top, plus interest. Try earning that at a bank today! Resist the temptation to pay late, because it’s not a money saver, it’s a money loser. Plus, penalties are not deductible.
Quick Tip: the IRS uses the term “tax deposit” to mean “tax payment”, and uses the term “monthly depositor” or “semi-weekly depositor” to mean “monthly payer” or “semi-weekly payer”, respectively.
Determine Your Payment Schedule
Before you can determine when the tax payment is due, you must first determine if you are a monthly depositor, or a semi-weekly depositor. Which type you are has nothing to do with when or how often you pay your employees. In order to determine which schedule you are on, examine the payroll records during the “lookback period”. This period always runs from July 1 to June 30. For 2006, the “lookback period” runs from July 1, 2004 – June 30, 2005. If the amount you withheld for 941 taxes is $50,000 or less, you are a monthly depositor. If the amount during that period is more than $50,000, you are a semi-weekly depositor.
Monthly Depositor
If you are a monthly depositor, you will pay the taxes by the 15th of the next month. For example, for 941 taxes withheld during August 2006, the payment was due on Friday, September 15. If the 15th falls on a weekend or Federal holiday, the payment is due the next business day.
Semi-Weekly Depositor
- If the payday falls on a Wednesday, Thursday, and/or Friday, the deposit is due on or before the following Wednesday.
- If the payday falls on a Saturday, Sunday, Monday, and/or Tuesday, the deposit is due on or before the following Friday.
The $100,000 Rule
Regardless of which type of depositor you are, if 941 withholdings reach $100,000 or more, a payment is due the next business day, and the semi-weekly deposit rules are in effect going forward.
Payment Methods
You may make payments one of three ways:
- The IRS will send you a yellow booklet containing coupons. Fill one out, and take a check to your bank. Be sure to fill out the top stub of the coupon for your records.
- Use the Electronic Federal Tax Payment System. Visit www.eftps.com for more information and to sign up. Allow about two weeks for the enrollment process to complete. Other types of taxes can be paid as well, using this system.
- Find a payroll provider who offers electronic payment of employment taxes, and enroll in that service.
Avoid Costly Penalties
- Don’t pay late
- Pay using the correct method
- Pay the correct amount
These guidelines are for Federal 941 payments only, and are intended for small businesses who have under $100,000 in Federal 941 payroll liabilities. See the Instructions for Form 941, and Circular E, for more detail and information.
IRS Tax Refund
Every year American’s scramble to get their taxes done to see if they are going to get an IRS tax refund. This money is often a welcome relief, and many use it to put away for savings, or to get larger ticket items for their homes that they may have been putting off. Each year I would look forward to this, as it meant that I could do a little guilt-free shopping. This year, however, that is going to change. For the first time in my life, I have to pay in. I guess it’s good that we are making so much more money, but having to pay in really isn’t fun.
For a long time our IRS tax refund was smaller, but still welcome. Once we added a child to our home, our refund got much bigger. I really didn’t give it much thought, but I thought it would be the same every year. It was always nice to get the IRS tax refund because I could use it for things my little girl needs. I thought this year I would get her a new bed and dresser, and put some of it away for her school clothes next fall. That was not meant to be.
My husband was always in a hurry to get our IRS tax refund back, so we always did our taxes in January, or at least as soon as we both had our tax information together. This year when he did the taxes on our software to get an idea of what we might expect to get back, he was puzzled. Though we knew we might have to pay some in because of my income, we had no idea how much it would be. He had a rather large refund coming from his income, but my tax ate that up, and I still owe quite a bit more. It was something of a shock, and we have delayed doing our taxes until we have to.
Normally, we would have already filed our taxes and we would have gotten our IRS tax refund back by now. This year we haven’t filed yet. I know we are coming up on the deadline, but it’s much harder to part with my hard earned money than I thought it would be. I know I have to pay taxes, and I know that there is no way around it, but that doesn’t make it any easier to do.
For a long time our IRS tax refund was smaller, but still welcome. Once we added a child to our home, our refund got much bigger. I really didn’t give it much thought, but I thought it would be the same every year. It was always nice to get the IRS tax refund because I could use it for things my little girl needs. I thought this year I would get her a new bed and dresser, and put some of it away for her school clothes next fall. That was not meant to be.
My husband was always in a hurry to get our IRS tax refund back, so we always did our taxes in January, or at least as soon as we both had our tax information together. This year when he did the taxes on our software to get an idea of what we might expect to get back, he was puzzled. Though we knew we might have to pay some in because of my income, we had no idea how much it would be. He had a rather large refund coming from his income, but my tax ate that up, and I still owe quite a bit more. It was something of a shock, and we have delayed doing our taxes until we have to.
Normally, we would have already filed our taxes and we would have gotten our IRS tax refund back by now. This year we haven’t filed yet. I know we are coming up on the deadline, but it’s much harder to part with my hard earned money than I thought it would be. I know I have to pay taxes, and I know that there is no way around it, but that doesn’t make it any easier to do.
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