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Whether this is the first year you are supposed to pay estimated taxes or you are already a veteran, this newsletter may be of interest to you all.
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As you know, the U.S. federal taxes are based on a "pay as you go" system, which means that businesses and individuals are required to pay their expected tax liability as they earn or receive their income from employment, busyness, or investment during the current income year. These payments can be made either under the form of estimated taxes or through withholding.
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Estimated tax is the method used to pay tax on income that is not subject to withholding and it applies generally to people with income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards.
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You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough, although you might want to consider adjusting your withholding instead of paying estimated taxes.
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In most cases, you must pay estimated tax for 2015 if both of the following apply:
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- You expect to owe at least $1,000 in tax for 2015, after subtracting your withholding and refundable credits;
- You expect your withholding and refundable credits to be less than the smaller of:
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90% of the tax to be shown on your 2015 tax return,or |
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100% of the tax shown on your 2014 tax return. |
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Note that these percentages may be different if you are a farmer, fisherman, or higher income taxpayer, and that your tax return for the year must cover all 12 months.
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You do not have to pay estimated tax for 2015 if you meet all three of the following conditions:
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- You had no tax liability for 2014,
- You were a U.S. citizen or resident alien for the whole year, and
- Your 2014 tax year covered a 12-month period.
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| To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year, and it may be helpful to use your income, deductions, and credits for prior year as a starting point. |
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| If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return. |
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| The penalty rate for the underpayment of estimated taxes may differ from year to year, and the amount depends on your particular circumstances. Usually, the IRS will figure any penalty that you owe for the underpayment of estimated taxes, and send you a bill. |
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| You may figure the penalty yourself using Form 2210, Underpayment of Estimated Tax, which contains both a short and regular method for determining your penalty. You first must determine the amount of tax that you have underpaid, and then the form can guide you through the process of figuring your penalty amount, which is directly based on the amount of your tax underpayment. |
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| Generally, if you do not make at least a minimum payment for a certain payment period, you will owe a penalty. Likewise, if you miss a payment for a certain payment period altogether, then you will owe a penalty from the date the payment was due until the date the payment is made. |
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| There are circumstances in which the IRS may waive your penalty for underpaying estimated tax. This may happen if: |
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- You failed to make an estimated tax payment due to a casualty, disaster, or other unusual situations;
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- You retired after age 62 or you became disabled;
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- You had reasonable cause for not making the payment, and you did not willfully neglect to make the payment.
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If you meet these conditions, then you are eligible to request a waiver of the penalty for underpaying estimated taxes. If you think that you qualify for a waiver of the penalty you will need to file Form 2210 in order to request a waiver, together with a written statement explaining why you did not make the estimated tax payment and designating the time period for which you are requesting a waiver. You also must provide documentation of your circumstances, such as evidence of your age and retirement date, documentation regarding your disability, or proof of a casualty, disaster, or other unusual situation, such as a police report or an insurance company claim or report.
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Usually, estimated tax payments must be made in four equal installments, although you might end up with unequal payments in some circumstances:
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- If you had your previous year's overpayment credited to your current year's estimated tax payments;
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- If you don't figure your estimated payments until after April when the first one is due;
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- If you unexpectedly make a lot of money in one quarter.
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For 2015 the due dates for estimated tax payments are April 15th for the first quarter, June 15th for the second payment, September 15th for the third quarter, and January 15th 2016 for the fourth payment. You do not have to make the payment due January 15, 2016, if you file your 2015 tax return by February 1, 2016, and pay the entire balance due with your return.
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The dates above are usually the same for every year, but if the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or a holiday.
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| If you do not have income subject to estimated tax until a later payment period, you must make your first payment by the due date for that period. |
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| If you do not receive your income evenly throughout the year your required estimated tax payment for one or more periods may be less than the amount figured using the regular installment method (which is the total amount of estimated taxes divided into four equal installments). The annualized income installment method annualizes your tax at the end of each period based on a reasonable estimate of your income, deductions, and other items relating to events that occurred from the beginning of the tax year through the end of the period. To see whether you can pay less for any period, complete the 2015 Annualized Estimated Tax Worksheet. |
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| To pay your estimated taxes, you may use Form 1040-ES, Estimated Tax for Individuals. The form includes a worksheet to help you determine your estimated tax. |
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| If you are filing as a corporation you must use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax. If you are filing as a corporation you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. |
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| You may pay online or by phone. You may also pay by check or money order, or by credit or debit card. If you mail your payments to the IRS, use the payment vouchers that come with Form 1040-ES. If you pay by check, make sure to make it payable to the United States Treasury, write your SS number and the year for which you are paying. |
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| After you start paying estimated taxes, be sure to keep a separate record of the dates you paid them and how much you sent for each period. If you don't keep accurate records, it can take you longer to prepare your income tax return, and you may miss one or more of the payments you made. If you pay estimated taxes, be sure to claim credit for them when you file your income tax return. |
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Unless you live in one of the states that don’t have income taxes, don’t forget to make state estimated taxes as well (you can get forms and vouchers for state payments online form their websites).
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As always, we recommend that you rely on professional advice to make sure you don’t underpay or overpay your taxes, either estimated or withheld.
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