ESTIMATED TAX PAYMENTS: Are You Required to Make Them?

The US tax system operates on a “pay-as-you-go” basis.? Most employees are made aware of this every payday when they get their paycheck.

Most employees have a deduction for “federal income tax withheld” (FWH) on their paystubs.? This amount represents the amount of money withheld from the paycheck by their employer and forwarded to the IRS to be applied to the employee’s current year income tax liability.

The employee may have other deductions from their paycheck as well, and these amounts shouldn’t be confused with their federal income tax withholding.? For example, “Medicare” and “Social Security” taxes are withheld.? These amounts are forwarded by the employer and they are applied to the employee’s Social Security retirement account.

The employee may also have State income tax withholding, which is forwarded by the employer to the employee’s State tax department.? If the employee has employer provided benefits (retirement, health, dental…), there may be amounts withheld for these benefits as well.

So, what are “estimated tax payments”, and who must make estimated tax payments?

Estimated tax payments are quarterly tax payments that provide an alternative/additional method of payment of a taxpayer’s income taxes on a “pay-as-you-go” basis.? Typically, taxpayers who receive taxable income throughout the year (interest, dividend, stock sales, sole-proprietorship/partnership income) with no withholding are required to make estimated tax payments.

According to IRS regulations, estimated tax payments are required in the following scenarios:

1.? You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and refundable credits.

2.? You expect your withholding and refundable credits to be less than the smaller of:

a. ?90% of the tax shown on the current year's tax return, or

b. ?100% of the tax shown on the previous year's return. (Note: If your adjusted gross income (AGI) on the previous year's return was more than $150,000 (or $75,000 if you are married filing separately), then you'll need to pay 110% of the previous year's tax.)

Self-employed individuals and some others often need to make estimated tax payments because they don’t have taxes withheld from their income.

Due Dates:

For most taxpayers, estimated tax payments are divided into four equal amounts to ensure they are evenly spread through the year. The payments are typically due on:

April 15

June 15

September 15

January 15 of the following year.

If the due date falls on a weekend or holiday, the payment is due on the next business day.

Penalties for Not Making Estimated Tax Payments:

If you don't pay enough tax through withholding and estimated tax payments, you may be charged a penalty. The penalty is essentially an interest charge for not paying taxes throughout the year. The rate for this interest charge varies and is set by the IRS.

How to Avoid the Penalty:

To avoid the estimated tax penalty:

Owe less than $1,000 in tax after subtracting withholdings and credits.

Pay at least 90% of the tax for the current year or 100% of the tax shown on the previous year's return (110% if your AGI was more than $150,000 or $75,000 if married filing separately).

Calculating the Penalty:

If you discover that you should have made estimated tax payments and didn't, or if you didn't pay enough, you can use IRS Form 2210, "Underpayment of Estimated Tax by Individuals, Estates, and Trusts", to see if you owe a penalty and to calculate the amount.

Please note that tax laws and IRS guidelines can change over time, so it's essential to consult the latest IRS publications or seek advice from a tax professional when making tax-related decisions.

We’d love to hear your thoughts. ?Please comment below, and if you found this guide useful, please give it a like and share it on social media to help others navigate their financial futures more efficiently.? Or contact ARI directly.