How Do Estimated Tax Payments Work?

0
747
Estimated Tax Payments

Income that is not subject to withholding is what people call estimated payment. In simple and easy terms, payments that are made quarterly to the income tax department by such people whose income isn’t subject to withholding taxes are estimated payments. Every person, whether he is earning through daily wages, bank interest, or rent, has to pay taxes on it. In the case of regular salaried employees, the taxes automatically get deducted from their paychecks and is then submitted to the IRS by their employer. But in the case of self-employed people and business owners, the case is somewhat different. To know how much tax you owe, you have to make an estimate of it and then pay it.  

Let us go through some important key points about estimated payments –  

  1. You are liable to pay an estimated tax payment if you owe $1000 or more for the tax year or in case you are the owner of a business corporation and own a tax liability of $500 or more. It doesn’t matter if you are an individual or work in a partnership; it is mandatory to make regular estimated tax payments on all taxable income that you earn, or else you might face a penalty for not paying or underpayment.  
  2. If the total withholding amount that you have paid in the tax year amounts to 90 or even 100 percent of the total tax that you will owe for this tax year or the previous year’s’ return, you don’t have to pay any sort of estimated tax payments.  
  3. Make sure to clear all your estimated payments until April 15, as soon as possible, to avoid any sort of penalties by the IRS.  

Who all has to pay estimated taxes?  

If you owe $1000 or more than that whenever you are planning to file your return, in case you are a sole proprietor, partner, or even shareholder, you have to make estimated payments on time. However, the amount varies from business to business. If your tax liability is more than $500, you are expected to make estimated tax payments whenever you are filing your next return. Also, in case your tax was zero in the previous year’s return, you have to pay estimated taxes for the current year. You get the benefit of making payments whenever you want and sending them to the department any time during the quarter. Making extra payments is always preferable because when you make an underpayment for a quarter, the extra payment will act as an agent to make up the difference. It happens when you earn more in a quarter than you expected!  

Who shall not pay estimated tax payments?  

When you receive salaries, you get the chance to avoid paying the estimated tax. You have to ask the employer to withhold more tax. The process is quite simple. Just file a new form, W-4, with your current employer. You have to enter all the additional amounts on the form that you want your employer to withhold. The details will be mentioned on the paycheck that will help you to make sure that you have entered the right amount of tax that will be withheld from your paycheck. There are various loopholes in this process. You don’t have to pay any estimated tax for the current year if you meet certain conditions –  

* When you had no tax liability of any sort for the previous years,  

* When you were a U.S citizen or had been living like a resident for the entire whole year,  

* When your previous tax year must have covered a full calendar year (12-month period).   

It should be noted that you are not liable for any tax liability for any prior or previous year if your total taxes were zero.   

Ways to easily calculate estimated taxes 

All you have to do is to figure your expected gross income or taxable income or any taxes and deductions for the current year. When you are figuring out your estimated tax for the current year, using your previous year’s income or deductions and credits might be a useful step in calculating estimated taxes properly. The previous year’s tax return acts as a guide to figuring out your estimated tax.   

The calculation is very simple. In a business, you can make an estimate of your earnings and can predict them easily. You have to do that exact same thing here. Make an estimate of the income that you expect to earn for the following year. Fill out the form 1040-ES in case the estimated earnings are high and recalculate your estimated tax for the next quarter. Do the exact same process with another form 1040-ES; if the estimated earnings are too low and recalculate your estimated tax for the next quarter. Try to make your estimation of your income as proper and accurate as possible in order to avoid any kind of penalties at a later stage. Make yourself updated with the recent changes in the tax law process in order to stay ahead in your business.  

Final thoughts:  

The tax department in the United States is different from other countries. The time limit to pay your income tax return is ideally by April, and at that time, it is considered that you have paid all of your taxes. Sometimes people pay advance taxes for which they are liable to get a tax refund from the IRS. Smart planning of tax filing can keep you on top of your business structure. Flyfin can help you find the best solution for your tax payments. But if you are still confused or not sure whether you qualify or how this system works, we are here to help you and will help you fill out all the right forms. We will search the estimated tax payments to get every dollar you deserve and help you uncover many deductions. Get going with us and pay your taxes on time with us!