Estimated payments are something mystical that only elves and the IRS understand? Nope! you too have the power to understand estimated payments.
Estimated payments are due:
- April 15th
- June 15th
- September 15th
- January 15th
What are they? Estimated payments are the amount of tax that is due from income. If you are an employee, the federal tax withholding is that ‘estimated payment.’
Who is responsible for doing the tax estimate? That burden is on the taxpayer. They are solely responsible for sending in payments and calculating the tax that might be due.
How do you do the estimate? Do a preliminary guess on what your estimated taxable income might be. For pension payments and social security, it is pretty straight forward.
But how do you know how much money your small business is going to make? Do you have a pretty good projection? Or is a toss a squirrel in the air type of projection? The tighter your income projection is, the better the estimated payment projection is. I have other posts on how to bring your accounting under control, if that is what is needed.
When the Federal or State taxes are filed each year, the estimated payments and actual taxes are compared. If the taxpayer has not made substantial payments, there is usually a fee or a friendly letter from the IRS.
Who usually finds themselves in this underpayment position?
- Retirees: Investments, Pension Disbursements, and selling assets may trigger this issue.
- Business Owners: Small businesses need to pay taxes like everyone else.
- Part Time Job Holders: If you have multiple part time jobs, it may be that are not getting enough tax withheld.
- AMT Tax. The AMT is a whole different subject. But it may add back tax.
- Lottery Winners (While most lotteries do withhold tax, remember that your other income is going to be kicked up to a higher tax bracket, which means more tax.)
If you have income that didn’t have any federal or state income tax withholding taken out, I would suggest that you talk to a CPA or Tax Attorney. If you do owe a substantial amount; work with them to come up with a plan to pay it, change your tax strategy, or don’t spend it before your tax obligations are met.
A little preplanning will eliminate that ‘WHAT?’ at tax time.