Should you be paying estimated tax payments?
You have a week left to make your 3rd Quarterly tax payment on time! If you are an employee and you get taxes taken out of your check this most likely doesn’t pertain to you. Estimated taxes typically pertain to the self-employed or those of you who have income other than your salary.
How to know if you need to pay estimated taxes? Here are a few questions to ask yourself.
- Do you expect your federal withholdings to be at least 90% of the total tax you will owe for this year then?
- Do you expect to owe less than $1,000 in taxes at the end of the year?
- Do you expect your withholdings to be 100% of your total tax on your previous year return?
If you answered no to any of the questions above you must make estimated tax payments to avoid a penalty.
Now you’re probably wondering how do I know how much to pay in estimated taxes? If you have a tax preparer they most likely suggest this once they finish your return and give you an estimate based on prior years. If this is the first year you think you might owe due to a capital gain, or starting a new business then you will need to figure out what you expect to be your total income for the year minus the deductions you will report on your federal return.
An easy way to help make your estimated tax payments is to use your refund from the previous year to go towards this upcoming year’s federal tax return if possible.
There is also the question of what happens if I don’t pay estimated taxes? Well… You could end up owing the IRS a penalty for underpayment additional to the tax you owe. The penalty varies depending on how much tax you owe and how long you have owed it.
If all of this information seems a little concerning and overwhelming I suggest you seek out a tax professional.