Estimated tax payments, and penalties, and interest...oh my!

Marcus Dillon

January 5, 2012

Okay, so maybe the title is a stretch but estimated tax payments and the IRS are a serious topic. Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough. Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your annual tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged penalties and interest. If you do not pay enough by the due date of each payment period you may be charged additional penalties and interest even if you are due a refund when you file your tax return.

Many taxpayers don't need to worry about estimated tax payments because the majority of their taxes are withheld through their paycheck. If you have a simple financial situation where you and/or your spouse only work one job and you have an appropriate amount of federal withholding being taken out every paycheck, you are probably okay and don't ever need to concern yourself with paying estimated taxes during the year.

Many of my clients that own small businesses are required to pay estimated tax payments personally because the amount of taxable income generated by their businesses at the end of the day are reported on their personal return (depending on the tax structure of their business). These clients are usually required to submit timely tax payments to cover such income for the previous periods. The due dates for these quarterly payments are on the 15th date of April, June, September and January (sometimes - weekends and federal holidays can skew this).

Estimated tax payments can be based off you prior year tax liability or estimated current year tax liability. We try to help our clients determine the best approach to take when sending estimated tax payments to the IRS. By having your CPA help you determine where you are during the year and monitoring your tax liability and payments, it will make the results of your annual tax return easier to understand and handle. The best approach you can take in accounting or income taxes is to have the most current financial records as timely as possible.

The last estimated tax due date for the 2011 tax year is January 17, 2012. This last payment for 2011 is a great opportunity for you to gather your actual results or estimates and rough out your tax liability that will be due with your tax return. If you are going to owe, it is always best to know in advance so you can properly plan your cash flow and not be in debt to the IRS (probably the worst people to owe money to). It also gives you an opportunity to send some additional money to the IRS for 2011 if needed. If you would like some assistance in assessing your financial situation, please let me know how we can help. One of the best parts of my job is helping businesses and individuals understand their financial situation betters and answering any questions that they might have. Feel free to email or call me today!

Marcus Dillon, CPA 

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