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Making Estimated Tax Payments

April 7, 2015

Those that have income not subject to withholding taxes or more than one job where the withholding is inadequate might need to pay estimated taxes four times a year.

Income not subject to withholding includes self-employment, partnership or S corporation income, interest, dividends, capital gains, option writing, rent income, prizes, awards, gambling or lottery winnings, pensions, certain legal settlements and alimony.

Taxes need to be paid to the IRS and any state you are taxed in.  Also, to be included is self-employment tax.  The general rule is that estimated taxes must be paid if the balance due after subtracting all withholdings is greater than $1,000 and also greater than 90% of this year’s tax.  However, there is an exemption from paying estimated tax if your withholdings are greater than last year’s tax (or greater than 110% of last year’s tax if your AGI last year was over $150,000 for a joint taxpayer), or if this is the first year you are filing a tax return.

25% of the estimated taxes are due on each of April 15, June 15, September 15 and January 15 of the next year. Underpayments will cause a penalty of 3% that is annualized on the amount that should have been paid.  Not a terribly onerous amount.  For those that have trouble budgeting the payments, you can make more frequent payments and even weekly or monthly payments if you want – just make sure you pay the required amount prior to each of the four due dates.

You can avoid paying estimated taxes if withholdings are sufficient.  You can ask your employer to increase your withholding or have greater amounts withheld from retirement plan distributions.  Further, even if you are not required to take an IRA distribution you can take one and have the funds applied fully to withholding tax; and then, to avoid having this treated as a taxable distribution, repay from other funds the full amount to the IRA within 60 days designating that it should be a tax-free rollover.

You are still required to pay estimated tax even if your income is earned erratically or at the end of the year.  In that situation, you can pay the proper estimated tax on actual income received through the month before the estimated tax payment due date.  This requires separate calculations before making each payment.  You will also have to record these calculations on Form 2210 when you file your taxes.

Those that will have an extension should consider including the first estimated payment along with the extension payment.  When you finally file, any overpayment will be considered as estimated payments and if you underpaid your extension payment the added estimated tax amount will cushion so interest and penalties for an underpayment with the extension will be avoided.  Those penalty and interest amounts are greater than the penalty for not paying the right estimated tax amounts.

3 Comments leave one →
  1. April 7, 2015 1:19 pm

    Information about extensions was posted last year at https://partners-network.com/2014/03/27/15-reasons-for-obtaining-extensions/

  2. 6hawthorne permalink
    April 8, 2015 3:42 am

    HI ED GOOD ARTICLE  BOB

  3. April 11, 2015 11:51 pm

    Ed
    Great post. Well written and clearly said. I will pass it along to some clients. Thank you
    Frank

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