Quarterly Estimated Tax Payments To The IRS
To provide for current payment of income taxes not collected through withholding, the law requires individuals in some instances to pay a portion of their tax throughout the year. For this purpose the year is broken down into four payment periods. A calendar-year individual is required to pay his estimated tax in four installments as follows: on April 15th , June 15th, September 15th and January 15th (of the next year). If the due date for making an estimated tax payment falls on a Saturday, Sunday or legal holiday, the payment will be timely made if made on the next day that is not a Saturday, Sunday or legal holiday. The appropriate payment voucher to use is Form 1040-ES.
Estimated tax is made up of the amount of income and self-employment taxes that an individual estimates will be owed less any income tax withholding and estimated credits against tax. Individuals who are self-employed or have a substantial amount of income above their salaries, may owe a penalty with their tax returns if they do not make quarterly payments to the IRS. The penalty calculation is figured on your personal income tax return or assessed by the IRS if not included on your return. The penalty is calculated like interest and is nondeductible. The current rate is 3% (1st & 2nd quarter 2021) and may change quarterly. This penalty is assessed during the current year and stops at April 15th of the next year. Additional penalties and interest might apply then if your tax bill is not paid.
No penalty for failure to pay estimated tax will apply to an individual whose tax liability for the year, after credit for withheld taxes, is less than $1,000. Also, you need not pay estimated, quarterly tax payments if you had no tax liability for the preceding tax year, provided it was a full 12-month period.
In addition to these rules, there are three ways generally to assure that you will not owe a penalty for failing to pay in enough during the year.
This article was written by Nancy K. Phillips, CFP®, CPA and/or her staff. It is intended to provide you with an informative summary of current business, financial and/or tax planning news. Do not apply this general information to your specific situation without additional details and/or professional assistance.
Estimated tax is made up of the amount of income and self-employment taxes that an individual estimates will be owed less any income tax withholding and estimated credits against tax. Individuals who are self-employed or have a substantial amount of income above their salaries, may owe a penalty with their tax returns if they do not make quarterly payments to the IRS. The penalty calculation is figured on your personal income tax return or assessed by the IRS if not included on your return. The penalty is calculated like interest and is nondeductible. The current rate is 3% (1st & 2nd quarter 2021) and may change quarterly. This penalty is assessed during the current year and stops at April 15th of the next year. Additional penalties and interest might apply then if your tax bill is not paid.
No penalty for failure to pay estimated tax will apply to an individual whose tax liability for the year, after credit for withheld taxes, is less than $1,000. Also, you need not pay estimated, quarterly tax payments if you had no tax liability for the preceding tax year, provided it was a full 12-month period.
In addition to these rules, there are three ways generally to assure that you will not owe a penalty for failing to pay in enough during the year.
- The general rule is that at least 90 percent of an individual’s final income tax is to be paid through either withholding or estimated tax payments. If your income fluctuates greatly, this requires you to estimate the current year quarterly, which can sometimes be hard to do.
- Paying 100 percent of the tax shown on the prior year’s return is the easy method that I often use. Use the line labeled “This is your total tax” shown on your prior year’s tax return. This would be the preferred method if your income is going up in the current year. You may use this method provided the prior year was a 12-month period and your prior year’s adjusted gross income is not over $150,000 ($75,000 for married individuals filing separate). If your prior year’s adjusted gross income exceeds this amount you must pay in 110 percent of last year’s tax. These are the current rules for quarterly payments for 2009 and thereafter.
- Paying installments on a current basis under an annualized income method, the payments may be made through withholding or annual installments. This method is suitable for taxpayers whose income is received or accrued more heavily toward the end of the year. However, for self-employed persons, the self-employment taxes are generally due toward the first part of the year since the self-employment tax for a self-employed individual stops after $142,800 of earnings in tax year 2021.
This article was written by Nancy K. Phillips, CFP®, CPA and/or her staff. It is intended to provide you with an informative summary of current business, financial and/or tax planning news. Do not apply this general information to your specific situation without additional details and/or professional assistance.