This subject has been one of the toughest for past clients, other taxpayers, and my college students to comprehend. This is especially true when discussed in conjunction with the submission of a request for an automatic six-month extension for the time to file a tax return. The logic is usually communicated in some variation of “I just requested a six month extension for filing my tax return, so I now have six months in which to find the money to pay the taxes that I owe.” That’s not exactly the way that the system works. Under certain circumstances, you could be required to have a mandatory 28% of your income withheld to fulfill the “backup withholding” requirements.
The United States income tax system is structured on a “pay-as-you-go” basis. This means that your income taxes must be paid as you earn or receive your income throughout the year. You can fulfill this requirement in either one of two ways, which includes a combination of both: 1) through the payment of Federal (and State) withholding, or 2) by making quarterly estimated tax payments. If you do not pay your quarterly taxes through withholding taxes or do not pay enough in taxes using that method, you may also be required to make quarterly estimated tax payments. If the total of all of your tax payments for the year were not paid (remitted) either through withholding or estimated tax payments, you may incur both an underpayment tax penalty and interest for the underpayment of your annual estimated tax obligation. (See the instructions for completing Form 2210). Addtional information can be obtained from Tax Topic 306.Â
The easiest method to meet this requirement is through the Electronic Federal Tax Payment System (EFTPS). There is usually a State equivalent. You can apply and enroll online at http://eftps.com The website allows you to designate a bank account from which the funds will be withdrawn electronically. You can also set up future, recurring quarterly payments and amounts. Not sure of the amounts? The system can accomodate changes/updates 24 hours or more in advance of the due date. If you don’t want the U.S. Treasury to have access to your personal bank account, then contact your bank and set up a separate account just for your tax payments. There is usually no addtional cost for this account. If there is, join a credit union! Â
Six Tips for Paying Estimated TaxesÂ
Estimated tax is a method used to pay tax on income that is not subject to withholding. You may need to pay estimated taxes during the year depending on what you do for a living and what type of income you receive.
These six tips from the IRS will provide you with a quick look at estimated taxes and how to pay them.
- If you have income from sources such as self-employment, interest, dividends, alimony, rent, gains from the sales of assets, prizes or awards, then you may have to pay estimated tax.
- As a general rule, you must pay estimated taxes in 2011 if both of these statements apply: 1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and credits, and 2) You expect your withholding and credits to be less than the smaller of 90% of your 2011 taxes or 100% of the tax on your 2010 return. There are special rules for farmers, fishermen, certain household employers and certain higher income taxpayers.
- For Sole Proprietors, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
- To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year. Use the worksheet in Form 1040ES, Estimated Tax for Individuals for this. You want to be as accurate as possible to avoid penalties. Also, consider changes in your situation and recent tax law changes.
- The year is divided into four payment periods, or due dates, for estimated tax purposes. Those dates generally are April 15, June 15, Sept. 15 and Jan. 15.
- Form 1040ES, Estimated Tax for Individuals, provides all you’ll need to pay estimated taxes. This includes instructions, worksheets, schedules and payment vouchers. The easiest way to pay estimated taxes, however, is electronically through the Electronic Federal Tax Payment System or EFTPS. You can also pay estimated taxes by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.
For more information on estimated taxes refer to Form 1040ES and its instructions, as well as Publication 505, Tax Withholding and Estimated Tax. These forms and publications are available at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Links:
- Form 1040ES, Estimated Tax for Individuals
- Publication 505, Tax Withholding and Estimated Tax