{"id":86,"date":"2012-03-13T18:36:57","date_gmt":"2012-03-13T18:36:57","guid":{"rendered":"https:\/\/ayoub-associates.com\/blog\/?p=86"},"modified":"2012-07-31T04:46:37","modified_gmt":"2012-07-31T04:46:37","slug":"tips-for-paying-estimated-taxes","status":"publish","type":"post","link":"https:\/\/ayoub-associates.com\/blog\/tips-for-paying-estimated-taxes\/","title":{"rendered":"Tips for Paying Estimated Taxes"},"content":{"rendered":"

Following the U.S. economy’s crash in 2008,
\nmore and more jobs were cut,, and salaried positions became increasingly
\nscarce. Many people experienced career changes and significant income swings.
\nOften, this meant facing unfamiliar federal income tax requirements, like
\nestimated taxes, which can confuse the newly self-employed. Accounting experts
\nhave a few tips to help taxpayers avoid mistakes that result in penalties and
\ninterest.<\/strong><\/p>\n

Who pays<\/strong><\/p>\n

Paying quarterly, estimated taxes can be a chore. Typically, people abhor dealing with
\ntaxes even once a year. Sandy Zinman, a certified public accountant who serves
\nas the tax committee chair for the National Conference of CPA Practitioners,
\nsays it can become extremely complicated and distressing.<\/p>\n

Generally speaking, anyone who owes more than $1,000 in a given tax year, after
\nsubtracting withholding and refundable credits, is required to pay quarterly
\nestimated taxes. Traditionally this applied to high income taxpayers because of
\nrevenues from sources such as interest, dividends or rent.<\/p>\n

\u201cEstimated taxes generally do not apply for the low-income person,\u201d Zinman said. \u201cThe joke
\nhas always been that it\u2019s a good problem to have. It means you made money
\n(during the year).”<\/p>\n

Salaried individuals and those paid hourly wages typically do not pay estimated taxes.
\nTheir federal income taxes are withheld from their wages throughout the year by
\ntheir employers. Self-employed individuals, however, are solely responsible for
\nensuring that their federal income taxes are paid at the right time.<\/p>\n

How to pay<\/strong><\/p>\n

The IRS requires that individuals estimate what their total income tax for the year
\nwill be and divide it into four equal installments. The installments must be
\npaid on April 15, June 15, Sept. 15 and Jan. 15, unless the 15th falls on a
\nweekend or federal holiday, in which case the due date becomes the first
\nbusiness day following the 15th.<\/p>\n

Without exception, the payment \u2014 by check or money order accompanied by the correct IRS
\nvoucher \u2014 must be postmarked by the due date, Zinman cautioned.<\/p>\n

\u201cIf you miss it by one day you get slapped with a penalty,\u201d he said. \u201cIf you\u2019re out
\nof the country and your flight gets delayed a day … and you miss the
\ndeadline, you get penalized plus interest. Who wants to pay a penalty?\u201d<\/p>\n

Estimating estimated taxes<\/strong><\/p>\n

When attempting to estimate your income tax for the year ahead, you are predicting
\nthe future. If you underestimate, you may be penalized for the number of days
\nit remains unpaid, said Thomas Jensen, a financial planner based in Portland,
\nOregon. The simple way to ensure that you pay what you owe, Jensen said, is to
\npay at least 100 percent of the tax you paid the previous year, unless you have
\nsome indication you are going to earn significantly less.<\/p>\n

\u201cIf you think you are going to make less, calculate about how much and try to pay
\n90 percent,\u201d Jensen said.<\/p>\n

If you pay 100 percent, and still owe a little more at the end of the year, that\u2019s
\nOK, Zinman said.<\/p>\n

Jensen offers an example of a “safe harbor payment” \u2014 a payment that ensures
\nyou will not be penalized. If you are married, filing jointly and your adjusted
\ngross income is below $150,000 (or below $75,000 if you are single or married
\nand filing separately), you may make a payment equal to 100 percent of what you
\npaid in income taxes the previous year or 90 percent of the tax for the current
\nyear. Taxpayers whose adjusted gross income is $150,000 or more must make a
\npayment equal to 110 percent of the previous year\u2019s taxes or 90 percent of the tax
\nfor the current year.<\/p>\n

In either case, you will still owe taxes at the end of the year, but you will not
\nface penalties and interest.<\/p>\n

The IRS provides a worksheet for Form 1040 ES. It instructs taxpayers how to
\nestimate their taxes. It can get very confusing, says Tim Clegg, a Boston-based
\nfinancial coach and retired tax advocate.<\/p>\n

\u201cThe 1040 ES instructions have elaborate standards, and I generally tell people not
\nto get all hung up on that,\u201d Clegg said. \u201cJust figure out a best guess of what
\nyou owe and send it in.\u201d<\/p>\n

Don?t put it off<\/strong><\/p>\n

The potential penalties and interest of missed payments are bad, but they are
\nnothing compared to not preparing for a tax bill at the end of the year, Clegg
\nwarns. He advises that you recalculate the estimated taxes at mid-year to see
\nwhere you are.<\/p>\n

\u201cYou should be estimating at least twice a year and as early in the year as
\npossible,\u201d Clegg said.<\/p>\n

Whatever amount you estimate you will owe for the year, you should pay it early in the
\nyear and get it out of the way, he says. Consider 25 percent for the mid-April
\npayment and 50 percent for the mid-June payment, he said.<\/p>\n

\u201cI have seen many start-ups suffer in their first or second year from the shock of
\nnot really understanding paying estimated taxes,\u201d Clegg said. \u201cHeading into the
\nnext year, they\u2019re playing catch-up and finding themselves in the same
\nposition, and complaining, ‘I\u2019m never making money.\u2019\u201d<\/p>\n

Even
\nworse, profits may have dried up at the end of the year, says Clegg. Following
\nhis advice, a taxpayer will have a large chunk of debt wiped out in advance of
\na downturn, he said.<\/p>\n

\u201cIn that case, you\u2019ve got options,” he said. “If you need to, you can do
\nthe end-of-year push and pull, such as purchasing business equipment or
\ndelaying billing until the new year.\u201d<\/p>\n

Card payments<\/strong><\/p>\n

The Internal Revenue Service allows for quarterly estimated taxes to be paid with a
\ncredit or debit card, which it touts as a convenient way to pay during the
\nyear. Card payments may be made over the phone, online or when e-filing.
\nBenefits include:<\/p>\n