Our Northeast Ohio Tax Litigation Lawyer Shares What You Need to Know About Estimated Tax Payments
Understanding estimated tax payments to the IRS is crucial for individuals and businesses alike. These payments ensure that taxpayers meet their tax obligations throughout the year rather than waiting until tax season. Our skilled Northeast Ohio tax litigation lawyer can help you understand estimated tax payments, covering everything from calculation methods to important deadlines.
Taxes Are Paid on Income While It Is Earned
All taxpayers, whether individuals or businesses, must pay federal income tax to the IRS as they earn their income during the year. Most individuals usually have their federal income tax paid through their W2 wages. If a person is retired, they have their federal income tax paid through withholdings on their pension, IRA distributions, or even their social security.
If there are not enough taxes withheld on these sources of income, then the individuals should make estimated tax payments. If a person is self-employed or works in the gig economy, then the individual should also make estimated tax payments to the IRS on their earned income during the year.
What Happens if Estimated Tax Payments Are Not Made?
If an individual does not make estimated tax payments and is required to do so, they will be charged a penalty for underpayment of estimated tax. As a general rule, most taxpayers can avoid this penalty if they owe less than $1,000 or if they paid in taxes at least 90% of the tax for the current year or 100% of the tax shown on their tax return for the prior year.
How and When to Pay Your Tax Payment
An estimated tax payment to the IRS can be paid in several ways. The payment can be made via a paper check and by mailing a payment voucher form 1040ES to the IRS. Estimated tax payments can also be made via the IRS website or through the Electronic Funds Transfer Payment Systems (EFTPS). To use the EFTPS payment system you must be enrolled to use this system.
Generally, estimated tax payments should be paid four times a year. The payments are due 15 days after the end of each quarter. If you make payments online, you are able to make monthly payments instead of waiting till the end of the quarter.
For self-employed individuals or those individuals whose income fluctuates significantly due to a large capital gain or the sale of real estate, it is important to make estimated tax payments. Otherwise, penalties will be assessed that could have been avoided.