One of the main causes of federal income tax troubles is not paying enough income tax throughout the year. The United States income tax system is a "pay tax as you go" type of system. In other words, taxes must be paid as you earn income (wages, salaries, self-employment income, capital gains, etc.). Income taxes can be paid either by way of withholdings or estimated tax payments which are paid on a quarterly basis. If you do not pay a sufficient amount of taxes throughout the year, a penalty could be charged on your tax return (even if you are due a tax refund).
One way to avoid owing income taxes at yearend is by paying a sufficient amount of withholding and/or estimated taxes to cover all applicable taxes that could be assessed on your return, such as self-employment tax, alternative minimum tax, and federal taxes.
If you don't think you've paid in enough taxes and will owe at the end of the year, this blog will help you find some possible solutions to your issue. Additionally, this article will provide information about how to determine if you must pay estimated taxes, and how to calculate any potential taxes you may owe.
Do I have to pay estimated taxes?
Estimated tax payments must be made by individuals, sole proprietorships, partners and S-Corporation shareholders. These payments must be made if you expect to owe at least $1,000 ($500 or more for corporations) in the taxable year after subtracting your withholding payments and any tax credits you expect to be eligible to claim on your current year's tax return.
If you expect your withholdings and credits to be sufficient enough to cover at least 90% of the tax for the current taxable year or 100% of the tax shown on last years' return, you do NOT have to pay estimated taxes.
In addition to the above statement, no estimated tax is due for the current year if you meet all three conditions:
- You had no tax liability last year (total tax calculated on the return was zero or you were not required to file a tax return last year);
- You are a US citizen or resident for the entire year;
- Your prior tax year covered a period of 12 months.
How to calculate estimated tax payments.
Avoid tax problems by using Form 1040-ES to calculate your estimated tax payment. To estimate your income for the year, it is usually easiest to start with your last year's tax return which will show the total income and deductions you claimed. You can also use your current year's check stub and expense statements to estimate your income and expenses.
Payment due date for estimated tax payments.
Estimated payments are due quarterly on April 18th, June 15th, September 15th and January 17th of the next year. When any of these dates fall on a Saturday, Sunday or a holiday, the payment is due on the next business day. Additionally, if you file your return by January 31st, you do not have to make an estimated tax payment in January.
How to pay your estimated taxes.
Once you've determined that an estimated tax payment is due, you can make your payment online, via mail or the IRS' Electronic Federal Tax Payment System (EFTPS).In closing, paying an appropriate amount of income taxes via withholding or by paying estimated taxes can help you avoid large tax liabilities at the end of the year. Another resource that can help you avoid tax surprises is having a mid year or pre-yearend tax analysis peformed by your CPA or other tax professional.
Check out our other blog articles that may interest you:
4 Reasons Why You May Owe Taxes
