Estimated Tax Payment Essentials
Taxes are a part of the business landscape in Colorado and across the country.
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Not only does a business have to pay taxes on its economic activities, but the income of the owner and employees is taxed as well. At one time or another, every person who has worked has become familiar with the process. A paycheck is issued and on the pay stub there is a list of withholdings made by the company to the IRS and other agencies. This withholding constitutes the projected taxes due to the government based on your income or earning amount. However, since business owners and others may not always take a traditional paycheck, the process for calculating taxable income is different. Determining if and when estimated tax payments need to be made can often be confusing. To help clients, prospects, and others understand estimated tax payments, Hanson & Co., has provided a brief summary of key issues below.
What is Estimated Tax?
Estimated tax is the process required by the IRS to be used by individual taxpayers for income that is not subject to withholding. Some examples of this income may include self-employment income, interest, dividends, rent, and gains realized from the sale of a house or other property. This process is designed to ensure that income, and when appropriate, self-employment tax payments are made on a timely basis. The IRS uses a “pay as you go” approach to taxation so individual taxpayers don’t wait until the end of the year to pay the IRS taxes owed on income.
Who Need to Pay Estimated Taxes?
Below is a list of key questions to help determine if an individual taxpayer needs to make estimated payments. These include:
- Does the taxpayer expect to owe more than $1,000 in taxes for the year after accounting for withholdings are already made?
- Does the taxpayer expect federal income tax withholding to equal at least 90% of taxes owed for the year?
- Is it reasonable to believe that the taxpayers withholding will be less than 100% of the taxes paid on prior year return?
If the answer to any of these questions is yes, then it is necessary to calculate and make estimated tax payments.
Estimated Tax Due Dates
The good news is that estimated taxes are calculated on a quarterly basis. It is possible that a taxpayer could have a liability in one quarter and not the next. For this reason, it is essential to work with a provider that can help guide you. When a tax payment is due it must be submitted by the following dates:
- April 15th is the deadline for first quarter payments
- June 15th is the deadline for second quarter payments
- September 15th is the deadline for third quarter payments
- January 15th (of the following year) is the deadline for fourth quarter payments.
Estimated Tax Payment Penalties
Like with most tax payment requirements, there is a penalty for failure to make timely estimated tax payments on time or for the correct amount. In fact, the most common penalty levied by the IRS is for underpayment of estimated taxes. The amount a taxpayer may be penalized for underpayment varies year to year as the amount of the penalty is dictated by how much tax is owed and the penalty rate. Most recently the penalty rate was 3% but the IRS regularly updates the rate. It is important to remember that since estimated tax payments are due on a quarterly basis, the IRS will determine penalties based on specifics from each quarter. So depending on the amount of income earned and corresponding tax payments missed, it is possible that the penalty amount will vary from quarter to quarter. The IRS will generally determine the amount of the penalty and send a notice to individual taxpayers. However, they do offer a method for calculating penalties using IRS Form 2210.
There are some circumstances under which the IRS will waive penalties for noncompliance. Waivers may apply if the following criteria is met:
- Taxpayer retired and is age 62 or older or has become disabled in the previous tax year and was not able to make required payments.
- There was a reasonable cause that the tax payment was not made;
- The failure to make the payment(s) was not due to willful neglect.
The IRS generally will also waive any penalties if the taxpayer could not make payments due to casualty, disaster, or other unusual circumstances.
Making timely estimated tax payments is essential for those taxpayers that have qualifying income. Failure to pay can lead to penalties and other issues with the IRS that can easily be avoided through proper planning. If you have questions about estimated tax payments or penalty calculations, Hanson & Co. wants to help! For additional information please contact us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon!