Estimated Tax Payments: Are You Required to Pay?
Do you consistently owe Uncle Sam money every year when you file your individual tax return? If so, you may be required to pay estimated taxes throughout the year. The International Revenue Services requires certain individuals to make quarterly tax payments, calling on the need to understand what estimated tax payments are, who is required to pay them, and your options for sending payments in.
What are Estimated Taxes?
Estimated taxes are taxes paid to federal and state governments based on your income in the current and prior year. According to the IRS, “Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments” (IRS). Estimated payments are based on different income sources, such as employment wages, interest, dividends, pass-through business income, capital gains and self-employment income. Furthermore, there are four quarters that you can pay in estimated taxes.
Who Needs to Pay Estimated Taxes?
Employees working at a business generally don’t have to worry about making estimated tax payments since they have federal and state taxes withheld from their paychecks. However, small business owners and self-employed individuals may be required to make quarterly payments based on earned and expected income. You are generally subject to estimated tax payment requirements if both of the following conditions are met:
You expect your tax liability to exceed $1,000 in the current year.
You expect your withholding to be less than 90% of the current year’s amount due or 100% of the prior year’s tax due.
If you meet both of those conditions, quarterly estimated taxes are required in order to avoid paying in fines and penalties when the individual tax return is filed.
How Can I Pay Estimated Taxes?
Paying estimated taxes can be done in two ways: through the mail or online. If you choose to pay by mail, you will remit a check along with an estimated tax voucher. The tax voucher can generally be found with Form 1040-ES. The other method of payment is online through the IRS website. There is a section titled “Pay Taxes Now” that you can click on. After that, you select “Make a Payment” and enter the relevant bank or credit card information. A question may appear asking for the reason for the payment. In these cases, you would select estimated taxes as the reason.
Summary
Understanding when you are subject to estimated tax payments can be a tricky topic, which is why we are here to help. Part of the reports our monthly clients get involve suggested calculated tax savings delivered straight to your inbox . Don’t wait until you get a bill from the IRS that will drain your savings account. Instead, start planning now.
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