Estimated Taxes

Doing taxes is fun. Especially when you have to pay tax estimates, which is our topic for today. Yes, you heard us right. Estimated taxes are a thing.

Estimated taxes refers to the method used to pay tax that is in excess of your withholding (read, the thing your employer takes out of your paycheck for things like income tax). Typically, this happens for income from self-employment, investments, prizes, awards, etc.

So who has these?

Typically, if you are a sole proprietor, partner, or S-corporation shareholder, you win. You get to pay estimated tax. But, there are a few things to consider.

You have to pay estimated tax if both of the following apply:

  1.  You expect to owe $1,000 or more in the following year after subtracting your withholding and refundable credits, and
  2. You expect your withholding and refundable credits to be less than the smaller of:
    1. 90% of next year’s tax (that would be your 2016 taxes); or …
      1. Fun fact … if at least 2/3 of your income is from farming or fishing, you can substitute 66% for 90.
    2. 100% of the tax on your current year return (we’re looking at you 2015 tax return, which is due on April 18, 2016).
      1. Another fun fact … if your adjusted gross income for the current year is more than $150,000, you must substitute 100% for 110%.  This is known as safe-harbor.

Anything else?

If you are a household employer (otherwise known as a person who has employees paid for a service within their residence … think babysitters or nannies), you must include household employment taxes when estimating next year’s taxes. Of course, there’s an if (did you expect anything less?). This is true if you have federal taxes withheld from wages, pensions, etc. or if you would be required to make estimates even if you did not include household employment taxes in figuring your estimates.

When are estimated payments due?

Estimates are due in four equal installments on April 18, 2016; June 15, 2016; September 15, 2016; and Jan 17, 2017.  Of course the IRS will not object if you make the payments early. They’re nice like that.

I don’t want to pay quarterly estimates.  What are my options?

You can increase the amount of withholding from your paycheck, pension, or other income sources to cover the amount that would otherwise have been paid via estimates.

How about no?

You may be subject to a penalty for failure to make estimated tax payments.  The penalty is essentially simple interest on the underpayment amount for the time period of underpayment.  The rate is adjusted quarterly by the IRS, but for 2015, the rate was 3% each quarter. There are different methods to compute the required installment in calculating the underpayment penalty.

You will also be subject to the penalty if you make a payment late.  For example, if you forget to pay the second quarter estimate until July 15, you will be assessed the penalty for the month the payment was late.

I don’t get it.

Taxes are fun … and complicated. So save yourself some time and headache and meet with a qualified CPA who can help you navigate tax estimates.

 

 

One comment on “Estimated Taxes

  1. […] Estimated Tax for Corporations – Although this form will not apply in most cases, quarterly estimated tax payments must be paid in order to avoid penalties if the total of the taxes on built-in gains, excess net […]

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