J. William Seabrooke CPA P.C.

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. 

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and enroll online at http://eftps.com  The website allows you to designate a bank account from which the funds will be withdrawn electronically.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!   (more…)