Throughout the year we receive a number of questions on various tax issues. During tax season, in meetings with client and prospects, we often hear the same questions and concerns over and over again. One topic that is almost always asked about is quarterly tax payments. There seems to be confusion about which taxpayers need to make these payments, when they are due, how they are calculated and if there are penalties for missing deadlines. To help clients, prospects and others understand estimated quarterly tax payments; JLK Rosenberger has provided a summary of key details below.
What is Estimated Tax?
Estimated tax is the process required by the IRS to be used by individual taxpayers for income that is not subject to withholding. Some examples of this income may include self-employment income, interest, dividends, rent, and gains realized from the sale of a house or other property. This process is designed to ensure that income tax, and when appropriate, self-employment tax payments are made on a timely basis. The IRS uses a “pay as you go” approach to taxation so individual taxpayers don’t wait until the end of the year to pay the IRS taxes owed on income.
Who Needs to Pay Estimated Taxes?
Below is a list of key questions to help determine if an individual taxpayer needs to make estimated payments. These include:
- Does the taxpayer expect to owe more than $1,000 in taxes for the year after accounting for withholdings is already made?
- Does the taxpayer expect federal income tax withholding to equal at least 90% of taxes owed for the year?
- Is it reasonable to believe that the taxpayers withholding will be less than 100% of the taxes paid on prior year return?
If the answer to any of these questions is yes, then it is necessary to calculate and make estimated tax payments.
Estimated Tax Due Dates
The good news is that estimated taxes are calculated on a quarterly basis. It is possible that a taxpayer could have a liability in one quarter and not the next. For this reason, it is essential to work with a provider that can help guide you. When a tax payment is due, it must be submitted by the following dates:
- April 15th is the deadline to pay 1st quarter taxes due
- June 15th is the deadline to pay 2nd quarter taxes due
- September 15th is the deadline to pay 3rd quarter taxes due
- January 15th is the deadline to pay 4th quarter taxes due
Estimated Tax Payment Penalties
Like with most tax payment requirements, there is a penalty for failure to make timely estimated tax payments on time or for the correct amount. In fact, it is the most common penalty levied for underpayment of estimated taxes. The amount a taxpayer may be penalized for underpayment varies as the amount of the penalty is dictated by how much tax is owed multiplied by the penalty rate. While penalty waivers are issued, it’s up to the taxpayer to submit necessary filings to receive a waiver.
As with all regulatory and tax filings requirements, it’s essential to stay current with filing obligations. Failing to file and make estimated tax payments can result in significant penalties from the IRS. If you have questions or would like assistance with your estimated tax payments, JLK Rosenberger is here to help. For additional information please contact us at 818-334-8623, or click here to contact us. We look forward to speaking with you soon.