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June Estimated Tax Payments Are Just Around the Corner
Article Highlights:
- Employees
- Self-Employed Individuals
- Individuals with Sources of Income Without Withholding
- Quarterly Payments
- Underpayment Penalty
- Safe Harbor Payments
Unlike employees, a self-employed individual must estimate his or her net earnings for the year and pay taxes on a quarterly basis according to that estimate. Failure to do so will result in interest penalties.
The self-employed are not the only ones who are subject to estimated tax requirements, which also apply to anyone who has income that is not subject to withholding taxes and even to those whose taxes are not sufficiently withheld. Thus, if you have income from stock sales, property sales, investments, alimony, partnerships, S-corporations, inherited pension plans, or other sources that are not subject to withholding, you may also be required to pay either estimated taxes or an underpayment penalty. Others subject to making estimated payments are individuals who must pay special taxes such as the 3.8% tax on net investment income or the employment tax on household employees.
Although these payments are called “quarterly” estimates, the periods they cover do not usually coincide with a calendar quarter.
|
Quarter
|
Period Covered
|
Months
|
Due Date*
|
| First | January through March | 3 | April 15 |
| Second | April and May | 2 | June 15 |
| Third | June through Augus | 3 | September 15 |
| Fourth | September through December | 4 | January 15 |
An underestimate penalty won’t apply if the tax due on a return (after withholding and refundable credits) is less than $1,000; this is the “de minimis amount due” exception. When the tax due is $1,000 or more, underpayment penalties are assessed.
These underpayment penalties are determined on a quarterly basis, so an underpayment in an earlier quarter cannot be made up for in a later quarter; however, an overpayment in an earlier quarter is applied to the following quarter.
The amount of an estimated payment is determined by estimating one fourth of the taxpayer’s tax for the entire year; the projected tax is paid in four installments. When the income is seasonal, sporadic, or the result of a windfall, the IRS provides a special form, and the underpayment penalty is based on actual income for the period.
For individuals who do not want to take the time to estimate their quarterly taxes but who still want to avoid the underpayment penalty, Uncle Sam also provides safe-harbor estimates.
However, even these can be tricky. Generally, a taxpayer can avoid an underpayment penalty if his or her withholding and estimated payments are equal to or greater than:
- 90% of the current year’s tax liability or
- 100% of the prior year’s tax liability.
- 90% of the current year’s tax liability or
- 110% of the prior year’s tax liability.
This office can assist you in estimating payments, adjusting withholding, and setting up safe-harbor payments. Please call for assistance.
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