Estimated Taxes: When to Pay, How to Pay, and Why You Should Pay
Estimated taxes are paid in quarterly installments (every three months) on income that is not subject to withholding, for example: interest, dividends, gains from stock, earnings from a business, and alimony.
Federal and state law requires:
– Non-wage employees
– Wage employees who are not subject to tax withholding to submit quarterly payments of estimated taxes.
Self-employment and income tax are paid by estimated taxes. The best way to avoid an underpayment estimated tax penalty is to pay 100% of your tax liability from the previous year, especially if you expect to make more income this year than last. If you anticipate your income to be less this year than it was last year, you can instead pay 90% of your current estimated taxes. This way you won’t have to pay more taxes than you’ll actually owe when the year is over. Corporations also must pay at least 90% of their current year tax liability. Those who are not subject to tax withholdings and make income outside their salary must include this income in their estimated taxes.
What happens if you don’t pay? (Or don’t pay enough??)
If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return and you must complete IRS Form 2210 to determine if you owe a penalty.
The IRS will charge daily interest on any taxes not paid on time, at an interest rate that is determined quarterly by the IRS. This interest rate is between 5-8% on an annual basis, and is only applied to the amount of underpayment.
If you’re required to make estimated tax payments, Federal (IRS) and State vouchers should have been provided to you by your tax preparer.
If you are still unsure, or have any questions at all, please feel free to call us before it’s too late!