What you need to know on IRS tax estimation
If you are a worker, your employer withholds taxes from each paycheck and sends the money to the IRS (Internal Revenue Service) and likely also to your state government. In this way, you pay your income taxes right away. And, if you’re like most salaried employees, you’ll get a nice refund when you submit your tax return.
But if you are self-employed or if you have income in addition to your salary, you may have to pay estimated taxes each quarter to clear up your tax bill with him. You may owe estimated taxes if you receive income that is not subject to withholding, for example:
- Dividends
- Gain on sale of shares or other assets
- Earnings from a business
- Taxable support or pension payments for the divorced spouse
Do I have to pay estimated taxes?
That depends on your situation. The rule states that you must pay your taxes steadily as you generate your income during the year.
If you did not pay enough income taxes through withholdings, quarterly estimated tax payments and / or credits on your return when filing your tax return, you may be subject to a penalty for underpaying.
To decide if you have to pay estimated taxes quarterly, answer these questions:
- Do you expect to owe less than $ 1,000 in taxes for the tax year, after subtracting your federal income tax withholding and credits from the total amount of taxes you expect to owe this year? If so, you can be calm; you don’t have to pay estimated taxes.
- Do you expect your federal income tax withholding and credits to be at least 90% of the total tax you will owe for this tax year? If so, you are safe and do not have to pay estimated taxes.
- Do you expect your income tax withholding and credits to be at least 100% of the total tax on your return from the previous year? Or, if your Adjusted Gross Income (AGI) (2018 Form 1040, line 7) on your tax return was higher than $ 150,000 ($ 75,000 if you are married filing separately), do you expect your withholding tax on the income and your credits are at least 110% of the total tax you owed for the previous year? If so, you are not obligated to pay estimated taxes.
If you answered “no” to all of these questions, you have to pay estimated taxes using Form 1040-ES. To avoid a penalty, your total tax payments (estimated taxes plus withholdings) during the year must meet one of the requirements just elaborated.
Which option should I choose?
The most certain option to avoid penalties for underpaying is to aim at “100% of your taxes from the prior year.” If the Adjusted Gross Income from the previous year was higher than $ 150,000 (or $ 75,000 for those who are married and submitted independently last year), you will have to pay 110% of your taxes from the previous year to meet the “port” requirement. If you meet any of the requirements, you won’t have to pay a likely tax penalty, no matter how much you owe on taxes with your return.
If you expect your income this year to be less than the year before and you don’t want to pay more taxes than you think you will owe at the end of the year, you can choose to pay 90% of your federal taxes. If your estimated payments, withholdings, and credits total less than 90% of what you owe, you may be subject to a penalty for underpaying. So you may want to keep your payments from getting too close to the 90% mark for a margin of safety.
If you expect your income this year to be higher than last year’s and you don’t want to end up owing taxes when you submit your return, try to make estimated tax payments enough to cover 100% of your income tax liability for the present year.
What should I do to calculate what I owe?
You have to get a good estimate of the income, deductions, and credits you will report on your federal tax return.
You can get a copy of the worksheet accompanying Form 1040-ES and do it yourself. Either way, you’ll need a few items to help you plan how much you should pay for estimated taxes:
- Your statement from the previous year. Make use of your prior year federal tax return as a confirmation method to make sure you consist of all of the income, deductions, and credits you expect to take on your current year tax return. You should also look at the total taxes you paid if you are going to base your estimated tax payments on 100% or 110% of your taxes from the prior year.
- Your record of estimated tax payments you already made for the year. You should take those payments into account to determine the amount of tax you continue to owe, so keep your check register handy to find the amounts and dates you paid.
Consider paying with your refund
A simple way to get ahead and pay your next year’s taxes is to apply the previous year’s tax refund to your next year’s taxes. If you are not going to have federal income tax withheld from your salary, or if you have other income and your withholdings will not be to cover your tax bill, you may have to make quarterly estimated tax payments. Having all or part of your overpayment applied to your estimated taxes is a relatively easy way to pay at least part of what you owe for next year.
What happens if I don’t pay?
You could end up being indebted to the IRS a penalty for underpaying in addition to the taxes you owe. The penalty will depend on how much you owe and for how long you owed it to the IRS.
Result: When you file your return, you will have to write a check for more than the IRS.
Should I pay equal amounts?
Normally, you pay your Tax estimation taxes in four equal installments. But you could end up paying fees for different amounts in some cases:
- If your overpayment from the prior year was credited toward your estimated tax payments for the current year.
- If you don’t calculate your estimated payments until after April 15, when the first payment is due.
- Yes, unexpectedly, you made a lot of money in a quarter.