Estimated Taxes – Who, How and When

FROM THE SMALL BUSINESS AND SELF-EMPLOYED DIVISION AT IRS.GOV – If the amount of income tax withheld from your salary or pension isn’t enough, or if you receive extra income throughout the year, you may have to make estimated tax payments.

Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty.

Who Must Pay Estimated Tax

Individuals, including sole proprietors, partners, and S corporation shareholders generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed. See the worksheet in Form 1040-ES, Estimated Tax for Individuals or Form 1120-W, Estimated Tax for Corporations, for more details on who must pay estimated tax.

Who Does Not Have to Pay Estimated Tax

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 (PDF) with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.

  • You had no tax liability for the prior year,
  • You were a U.S. citizen or resident for the whole year, and
  • Your prior tax year covered a 12-month period

How To Figure Estimated Tax

Individuals (including sole proprietors, partners, and S corporation shareholders) generally use Form 1040-ES (PDF), to figure estimated tax.  Corporations generally use Form 1120-W.

To figure your estimated tax, you must estimate your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. It may be helpful to use your income, deductions, and credits for the prior year as a starting point. Use your prior year’s federal tax return as a guide while you use the worksheet in Form 1040-ES to figure your estimated tax..

You will need to estimate the amount of income you expect to earn for this year. If you estimate your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimate your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. You want to estimate your income as accurately as you can to avoid penalties. Don’t forget to make adjustments both for changes in your own situation and for recent changes in the tax law.

When to Pay Estimated Taxes

For estimated tax purposes, the year is divided into four payment periods. Typically, due dates are April 15, June 15, September 15, and January 15 of the following year.

Using the Electronic Federal Tax Payment System (EFTPS) is the easiest way for individuals as well as businesses to pay federal taxes. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using EFTPS. If it’s easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you’ve paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.

Corporations must deposit the payment using the Electronic Federal Tax Payment System. For additional information, refer to Publication 542, Corporations.

Penalty for Underpayment of Estimated Tax

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

Need help figuring out if you should be paying estimated taxes? Contact our tax experts at Carpenter, Evert and Associates by calling (952) 831-0085, or click here to send a message.

 

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