If you earn an income, but taxes are not being withheld, you should consider paying estimated taxes. It doesn’t matter if the untaxed money comes from a prize you won, alimony, investments, or a job. If taxes are not paid on time and correctly, you could end up owing penalties and interest in addition to the taxes. Estimated tax is utilized to pay self-employment and income taxes and other taxes and amounts that you report on your tax return. However, if you pay estimated taxes but not the correct amount, you may be assessed a penalty. Also, if your payments are not made by the due date of each tax payment period, a penalty may be imposed even if you expect to receive a refund when you file your tax return. Most workers meet tax responsibilities through withholding by their employers. However, estimated taxes are the sole obligation of the person receiving the untaxed money. Form 1040-ES provides detailed instructions for calculating your estimated taxes and includes vouchers to send with your estimated tax amounts should you decide to pay by check.
Most people pay 100 percent of last year’s income tax debt if their business income is relatively even. However, even those who pay 100 percent of their prior year’s tax may discover they still owe more money to the IRS when they prepare their tax return. Typically, if you expect to owe more than $1,000 when you file your federal tax return, you should make estimated taxes payments. Following are some helpful tips for paying estimated taxes:
- Due dates: Four estimated tax payments are due each year on the 15th of April, June, September, and January. If that date falls on a federal holiday or weekend, the filing deadline is advanced to the next business day. If you file your tax return by January 31st, a payment is not required in January.
- Amount: To figure the amount of taxes you need to pay, estimate the approximate amount of income you expect to receive for the year and take into account any tax credits or deductions that you are eligible to claim. The IRS prefers you calculate the total estimated tax for the entire year and send in four equal payments according to the schedule.
- Form: IRS Form 1040-ES is available to help you determine your estimated taxes. There’s a worksheet in the form, which is also available as part of tax software programs.
- Method: You can mail a paper check with the Form 1040-ES voucher, file electronically with a credit card by enrolling in the tax agency’s Electronic Filing Tax Payment System (EFTPS), use the IRS’s Direct Pay option. Electronic payment options found on IRS.gov are a free and easy way to make electronic payments.
Often people who collect a regular pattern of untaxed money put off filing estimated taxes thinking that they can compensate for the missed payments at the annual April filing deadline. However, ignoring your estimated tax duties is not a good idea. If you end up owing $1,000 or more in April, you might have underpaid your tax bill. That could result in you owing added penalties and interest.
If you are not paying enough taxes during the year either by paying estimated tax amounts or by raising withholding on a full-time job’s W-4, a penalty may be assessed for underpayment of estimated tax. Most taxpayers can circumvent the penalty if they owe under $1,000 after deducting their credits and withholdings, or pay the smaller of either 90 percent of the current year’s tax or 100 percent of the tax amount on the previous year’s return. However, if you receive uneven income during the year, you might lower or eliminate the penalty by paying unequal amounts on the specified due dates and annualizing your income. Click to view more Human Resources
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