Estimated Taxes

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When you are an employee, your employer withholds taxes from every paycheck and sends the money to the IRS. When self-employed or earning income other than a salary, you need to pay estimated taxes each quarter. Income subject to quarterly payments include:
+ Interest income.
+ Dividends.
+ Gains from the sales of stock or other assets.
+ Earnings from a business.
+ Alimony.
At filing time, if you have not paid enough income taxes through withholding or quarterly estimated payments, there may be a penalty for underpayment.
When are estimated taxes due?
The IRS does not break the tax year into four three-month quarters. The first quarter is January 1 to March 31. The second quarter is only two months long from April 1 to May 31. The third quarter is three months from June 1 to August 31 and fourth quarter is the final four months of the year.
Installment payments are due on April 15, June 15, September 15, and January 15 of the following year, with adjustments made for weekends and official holidays.
See below to determine if you need to make quarterly estimated taxes.
+ Do you owe less than $1,000 in taxes for the tax year after subtracting federal income tax withholding from the total amount of tax you expect to owe this year? If yes, you are safe. There is no need to make estimated tax payments.
+ Do you expect federal income tax withholding, plus any estimated taxes paid on time, to amount to at least 90 percent of the tax that you will owe for this tax year? If yes, you are clear and do not need to make estimated tax payments.
+ Do you expect your income tax withholding to be at least 100 percent of the tax on your previous year’s return? If yes, you do not need to make estimated tax payments.
If none of these are the case, then you must make estimated tax payments. To avoid a penalty, your total tax payments, estimated plus withholding, during the year must satisfy one of the requirements just covered. These are general guidelines and there may be other reasons that allow you to avoid estimated payments or require you to file them.
The safest option to avoid underpayment penalties is to aim for 100 percent of your previous year’s taxes; meaning 110 percent of your previous year’s taxes to satisfy the safe-harbor requirement. If you do this, you are likely not to have to pay an estimated tax penalty, no matter how much tax you owe with your return. This may be the case for those with high incomes.
If you expect your income this year to be less than last year’s and believe you will owe at year-end, you can choose to pay 90 percent of your estimated current year’s tax bill.
How do you pay your estimated taxes? Should you pay in equal amounts? Usually it is in four equal installments. However, you might end up with unequal payments if:
+ You had your previous year’s overpayment credited to your current year’s estimated tax payments.
+ If you do not figure your estimated payments until after April, when the first one is due.
+ If you unexpectantly make a lot of money in one quarter.
Basically, there are no good reasons to pay penalties. Follow the rules. Your best bet is to contact us to make sure you are paying the right amounts at the right times.

Need Guidance and Help?
If you need advice, give us a call and we will be happy to discuss your situation.