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How to Pay Estimated Taxes

Each spring, as clients finalize their tax returns, we consider the coming year’s estimated tax payments.

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There’s almost always a resistance to making estimated tax payments. It’s not so much that people mind paying them – though we all know that’s a consideration. It’s that the payments don’t fall into a monthly routine. People don’t always remember to pay the taxes, with the weird payment schedule.

After all, the quarterly payments aren’t even made consistently every three months. They are due on April 15th, June 15th, September 15th and the following January 15th – unless those dates fall on a weekend or federal holiday. Then you get some extra time. Those dates are two months apart; sometimes, three and even four months apart. Lots of people have said it would be easier if they could just pay it, along with their monthly bills. I suppose you can – just make copies of each quarterly 1040-ES voucher and use it three times each quarter. (Do the same with your state vouchers.)

Simplification or red tape?

The IRS tries to make it easier by allowing you to automate the payments using the EFTPS system. You can set up an online account with IRS for free. Just link it to your bank account and schedule your payments for the year. Doesn’t that sound like a wonderful idea?

The only problem – it could be extremely difficult to cancel or change, according to taxpayers and preparers. For example, one person tried to stop a quarterly payment because she had earned nothing that quarter. She tried to make the change online. It didn’t work. She called the IRS, but was told there’s a glitch. The IRS got the money she didn’t owe and desperately needed to cover her rent.

She wasn’t alone.  Other taxpayers and tax professionals have run into this problem. And once paid, you can’t get it back until you file your tax return next year.

Punishment with a wet noodle

What’s if you simply don’t make your payments at all? You incur underpayment penalties. Are they a lot? Not really. For instance, just this week, a client didn’t make estimated tax payments on $2,900. She owed $62 – about 2% of the balance due. In essence, these days, the underpayment penalties are an annual rate of about 3%-5%. That’s a lot less than your credit card interest rate, if you have to charge the fees. But it’s less than you’re apt to earn from a certificate of deposit if you invest the money short-term.

What are the rules about making estimated tax payments?

For the current year, you need to pay in at least as much as your total tax balance was last year, if this year’s income is expected to be the same as last year’s. If your income is $150,000 or above ($75,000 – single), you must pay in 110% of last year’s tax liability.

If you expect to owe $1,000 or less this year, you don’t need to make any payments. You can just pay the balance due next April.

Who needs to make estimated tax payments? Anyone who can’t simply adjust their withholding from wages, pensions, unemployment, or other income sources so their taxes are automatically paid in at the source.

For the more complex details, and all the permutations for a variety of taxpayer types, read IRS Publication 505.

Are you paying your estimated taxes properly? Or banking on the low penalties?

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Eva Rosenberg, EA, is the publisher of TaxMama.com, where your tax questions are answered. Eva is the author of several books and e-books, including the newest edition of “Small Business Taxes Made Easy,” now available at your favorite bookseller. Eva teaches a tax-pro course at IRSExams.com.

Comments

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Comments (5 of 6)

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    • Nice article ! I am thankful for the info ! Does someone know where my business could possibly get access to a template a form version to edit ?

    • outstanding writeup….. quality post i must mention….that the post has been written amazingly … :)

      http://www.atc1040.com/

    • Incorrect information regarding the safe harbor rule for single folks – the threshhold is $150k not $75k as stated in the article.

      That is to say, singles can get by with paying only 100% and NOT 110% of their previous year’s income so as not to be hit with an underpayment penalty.

      The author confused singles with folks married filing separately.

      Also, I have been paying estimated taxes for years using the EFTPS system and have never had a problem. Best of all, it is free, unlike the companies passing on excessive credit card acceptance fees to the taxpayer.

      If some folks have had problems in automating their payments, then do not automate them. Just pay them manually four times during the year shortly before the due date.

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    • I just judge my tax liability through the current point in time and do an allocation from my IRA draw to satisfy it. I with-hold as I go, so it is not all that bad. But my wife had gains in her brokerage account last year that I had to get into safe harbor over. Rather sick. Half of my IRA draw will go to Federal Taxes this year to satisfy the IRA draw. Another 10% to the state. I wind up with 40 cents on the dollar. Maybe we can make a law that the Federal government has to hit within 10% on its expenditures or we hold a special election to throw the bums out. Seems only fair.

About The Tax Blog

  • The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at thetaxblog@dowjones.com.

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