Why You Should Be Making Estimated Tax Payments
Updated: Nov 22, 2019
September 9, 2019
Your individual income tax return is complete, and your tax advisor hands you four vouchers to pay towards next year’s return. What? You are just now paying this tax return balance and the year is already halfway over. Before you know it, you feel like a snowball rolling down a mountain of debt and taxes.
The good news is that the purpose of these vouchers are to jump start your snowmobile so that you can ride to the top, conquer the mountain, and focus on what you do best.
What are these vouchers and how are they calculated?
The IRS requires taxpayers to pay taxes as income is earned. If you are unable to pay through federal withholding on your income (i.e. because you are self-employed), that is when these vouchers come in handy.
In fact, the IRS requires those with tax liabilities of $1,000 or more (after other withholding) to make quarterly estimated tax payments and can impose a penalty for failure to make the payments timely. Generally, those required to do so must pay the lesser of 90% of the current year tax or 100% of the prior year tax (110% for higher earners). Certain exceptions apply for farmers, fishermen, and household employees.
Your tax team will typically figure these estimated amounts based on the return they are preparing, so be sure to make these payments by the deadlines and/or increase your withholding on other applicable income sources to ensure your covered.
When are these payments due?
Do I have to pay by check?
No, in addition checks or money orders, the IRS also accepts payment through various other convenient options, including logging on to IRS.gov, EFTPS.gov or the IRS2Go app and paying straight from your credit card or through auto draft.
However, no matter how you decide to pay, be sure to follow the instructions to make your payments towards the correct form, year, and account as correcting these can be burdensome, costly, and time consuming.
What this means:
It is especially important to notify your tax advisor of any potential changes in income so that they can revise your estimated vouchers and help you stay ahead while minimizing penalties and surprises.
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