As you know, most income you earn or receive over the course of a year is subject to being taxed. While in many situations the taxes are paid through withholding, other situations may require you to make estimated tax payments. Most often, this occurs when an insufficient amount of taxes are withheld from your salary, you receive other forms of income, or you own a business. When you don't pay your fair share of taxes, the IRS can subject you to penalties that may quickly accumulate. To make sure you know everything you need to know about estimated tax payments, read over the following information and always consult with a CPA should you have additional questions.
Who Must Pay Estimated Taxes?
As to who is expected to pay estimated taxes, this applies to individuals such as those who have sole proprietorships, partners, and shareholders in S Corporations. In these situations, estimated tax payments are usually made if the expected amount of taxes to be owed when filing a tax return exceeds $1,000.
When it comes to corporations, estimated tax payments need to be made when the amount of taxes owed is expected to be at least $500. Finally, estimated taxes may need to be paid for the current year if your prior year's taxes were more than zero, so keep this in mind as well.
Who Does Not Have to Pay Estimated Taxes?
While you may assume almost everyone has to make estimated tax payments, that is not the case. In fact, you can avoid these payments by simply asking your employer to withhold more of your income for taxes and by filing an updated W-4 form with your employer. If you file this form, pay attention to the line for the additional amount you want withheld, and make sure you enter the correct amount.
In other situations, you will not have to make estimated tax payments if you had no tax liability for the previous year, were a citizen or resident of the U.S. for the entire year, and your previous tax year did in fact cover an entire 12-month period. Since you don't want the IRS to accuse you of avoiding your tax payments, always consult with a CPA if the need arises.
Figuring Your Estimated Taxes
While it can be confusing in some aspects, figuring your estimated tax payments is actually easier than you may imagine. To do so, you'll need Form 1040-ES, which is used by all taxpayers except corporations, which use Form 1120-W. To accurately figure your estimated tax payments, you will be required to first figure your taxable income, adjusted gross income, deductions, taxes, and credits for the tax year. Along with the worksheet contained in Form 1040-ES, the process will be easier if you also use your federal tax return from last year and the income, credits, and deductions from that year as well. Even if these have changed, they will serve as an excellent starting point to give you the help you may need. But since it is likely tax laws may have changed and your own financial situation may also be different, don't rely solely on how you interpret certain IRS regulations. Instead, talk to a CPA to avoid making costly mistakes.
When Should Estimated Tax Payments be Made?
When paying estimated taxes, remember that the IRS divides the year into four payment periods. Once you are ready to make your payments, you can do so by mail, online, or even through your smartphone or other mobile device. In addition, the IRS will give you options to make your estimated tax payments even easier. So long as you make all of your tax payments within the given time period, you can send in payments each week, every other week, or even monthly, depending on what will work best for you and your financial situation.
Penalties for Underpaying Your Estimated Taxes
While the IRS does have penalties that can be imposed on taxpayers who underpay their estimated taxes, these penalties are generally not very severe, and in most cases can actually be avoided altogether. In most cases, taxpayers can avoid financial penalties if the amount owed after subtracting credits and withholdings is less than $1,000, or if the taxes paid for the current year are equal to at least 90% of what is owed.
In addition, penalties for underpaying estimated taxes may also be waived by the IRS if you can show you failed to make payments due to unusual circumstances such as a casualty or natural disaster, you retired upon reaching age 62, or you became disabled in the tax year for which estimated tax payments were to be made. To be sure you can avoid any penalties, always have detailed records that can back up any claims you make, since it is likely the IRS will want to verify your story before waiving the penalties.
Coronavirus Tax Relief
Due to the impact the COVID-19 pandemic has had on people throughout the United States, the IRS and Congress have passed legislation and put new regulations in place to help provide tax relief to those who may have lost jobs or businesses due to the pandemic. Specifically, the CARES Act has a provision in it that applies to self-employed individuals, allowing them to defer part of the Social Security tax. Thus, if you are self-employed, you may be eligible for such relief. To find out how this may help your situation, talk to a CPA as soon as possible.
Along with this information about various aspects of estimated tax payments, the IRS has other programs in place that may provide additional help in making sure you don't have to pay penalties. Yet if you try to sift through the various forms, worksheets, and other information on your own, you are almost certain to make mistakes along the way. To ensure you don't make costly mistakes that could result in penalties or you missing out on important relief opportunities, consult with a CPA today.