Keeping Up With Quarterly Estimated Tax Payments

By law, you have until April 15 (April 18 this year) to pay taxes on your income from the previous year. But, you could incur a penalty if you don't make payments throughout the year. If you'll owe more than $1,000 in taxes by the end of the year, you may be subject to the penalty.

If the amount of your withholding from wages is at least 90% of your current year tax liability - or 100% or more of the tax on the prior year return, you won't be penalized. But, pay attention to income sources without withholding. If you aren't withholding, you'll need to make payments on that income throughout the year.

These estimated tax payments are normally submitted quarterly along with the filing of form 2210. So how do you know what to pay?

Usually, you would estimate your quarterly installments based on the tax your paid the previous year. If your income is reasonably stable, this should work well. But, if your income fluctuates, you could underpay and be penalized, or overpay - which needlessly takes operating money out of your pocket. Whether you anticipate making more, or less, you should estimate your income for the year, determine your tax for the year and then pay that amount in four equal payments.

For the self-employed, it is more involved. Because self-employed persons pay the employer part of Social Security and Medicare taxes, self-employed individuals owe both their federal income tax and their self-employment tax with their estimated tax payments. The self-employed always owe self-employment tax on business income.

At Accounting World CPA & Consulting, PLC, we routinely help our clients meet these requirements whether their income is stable or fluctuating. Give us a call. We can help you too.