Paying Estimated Tax Payments
Employers have to withhold taxes from their employee’s paychecks and send the money to the IRS and the state government as well. This ensures that employees pay their income taxes as they go. If you are just like any other wage earner, you would receive a refund during tax time. However, for those of you who have an income other than salary or are self-employed, you would have to pay estimated taxes every quarter. Even if your income is not subject to withholding tax, you might still owe estimated taxes such as in the following cases.
- Taxable alimony
- Earnings from a business
- Gains from proceeds of stock or any other asset
- Interest income
So, Do I Have To Pay Estimated Taxes?
When it comes to whether you should pay estimated taxes or not, the answer to the question is not as straightforward as you would like as it all depends on your situation. Generally, you are required to pay your taxes as you go. If you fail to do so, you will have to pay a penalty for underpayment at the time of filling your annual tax return. The reason behind this is that you have to pay most of your income taxes through quarterly estimated payments or withholding payments. You need to consider the following questions to determine if you need to make quarterly estimate payments.
- Do you think that you would owe under $1,000 in taxes for the tax year after you deduct your federal income tax withholding from the total amount of tax that you owe for the year? If it is the case, you would not need to make any estimated tax payments.
- Will you have an income tax withholding that is at least 100% of the total tax on the previous return submitted? Or, if you have an adjusted gross income of over $150,000 on you expect that the income tax withholding would be at least 110% of the total tax owed for the previous? If your answer is a “yes”, you are not required to make the estimated tax payments.
- Do you expect that your federal income tax withholding would amount to at least 90% of the total tax that you owe? Then, you would not have to make any estimated tax payments.
However, if your answer to all of the above questions is a “no”, you will need to make estimated tax payments by submitting Form 1040-ED. You must satisfy one of the requirements that have been mentioned above to avoid a penalty.
Which Option Should You Select?
Once again, your situation influences which option you should select. However, the safest option would be to aim for 100% of the previous year’s taxes to avoid an underpayment penalty. To satisfy the safe-harbor requirement, you will need to pay 110% of last year’s taxes if your previous year’s adjusted income was over $150,000 or $75,000 if you are married and filing your return separately. By satisfying the test, you would not need to pay any estimated tax penalty.
If you have more questions, you should feel free to contact us.
Would you like to share your thoughts?
Your email address will not be published. Required fields are marked *