Find A Safe Harbor With Estimated Tax Payments

Find A Safe Harbor With Estimated Tax Payments

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Almost everyone who receives a regular wage or salary fills out a W-4 form and submits it to his employer. This tells the government, among other things, how much money to withhold from the employee's wages. If the employee owes too much the following April 15, the form can be resubmitted to correct this. But anyone not in this category should beware the reefs of tax penalties by making estimated tax payments.

The global economy is changing life everywhere and now an increasing number of people earn money apart from or instead of wages. More people start their own business and are self-employed. They file no withholding form and so are in danger of tax penalties if they pay too little during the course of the year.

Some types of income may surprise people. Alimony, gifts and awards, unemployment benefits are all taxable. Rent received from tenants is a popular way to make money in hard times and should not be forgotten. It is not reported until the end of the year and so tax is not withheld. Interest income and dividends must be considered as well when figuring the amount of the estimated tax due.

Generally speaking, a taxpayer who ends up owing a thousand dollars or less on April 15 does not need to worry about making estimated tax payments throughout the year. But those who expect to owe more than this should take a few moments to figure out their estimated tax and begin sending quarterly payment to the Internal Revenue Service right away.

The method of figuring one's estimated tax payments is quite simple. Take the prior tax year as a guide, so long as the taxpayer did not live outside the United States for part of the year. The total tax for the prior year is then divided into four parts. Payments of these portions will be made on June 15, September 15, January 15 and April 15. Notice that a quarterly payment may be due on the same day as the annual tax return (April 15), so the taxpayer may have to write two checks on that day.

There is a funny spacing in these due dates that may not be apparent to the casual observer. Though they are called quarterly, they are not all three months apart. One interval is two months, another is four. The correct form and worksheet for making the payment is IRS Form 1040-ES.

Using the prior tax year to estimate payments is called the safe harbor method because the government will not penalize those who use it correctly even if they owe more tax than is computed by this method. Sending one-fourth of last year total tax on each due date will avoid penalties. However, taxpayers who have increased their income considerably from one year to the next may still be faced with a huge tax bill April 15. Those who want to avoid this should consider making voluntary payments above the required amount.

The choppy waters of tax compliance are often full of shoals and reefs for the unwary. But anyone who sticks faithfully to the safe harbor method will reach port safely and without loss or damage.

About the Author:
Estimated tax payments can be found on our website www.estimatedtaxpayments.org.



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