Estimated taxes are a practice of pre-paying taxes typically on a quarterly basis. The total amount of these payments is based on the income during the year and the taxpayer’s estimated tax liability. The income in this calculation is income not subject to any other form of withholding. Normally, this includes self-employment income, dividend income, rental income, interest income, or capital gains.
Under United States law, citizens with income are required to pay tax in some form. Many American entities are required to pay taxes through estimated taxes. This practice helps ensure the government will receive its taxes and allow entities to not have to pay their taxes in a lump sum on Tax Day. However, not all entities must make estimated payments. It is essential for all taxpayers to know where they fall and what taxes they are obligated to pay under law.
Have to Pay Estimated Taxes, Yes or No?
The type of organization and the amount of income it generates determines what taxes it pays. The following entities must make estimated tax payments if they expect to owe $1,000 or more after any withholdings when the tax return is filed:
Corporations that expect to owe $500 or more are also required to make estimated tax payments.
Most entities are obligated to pay estimated tax payments by law, but there are certain circumstances where this is not the case. In situations where an individual’s primary source of income is salary/wage based, these individuals may file a Form W-4 with their employers to avoid making estimated tax payments. In this form, individuals can request your employer withhold more from your earnings to pay for the tax on the other types of income noted above, circumventing the need for estimated tax payments. This is done by filling out a certain line on Form W-4, where they state the additional tax you wish your employer to withhold from each paycheck.
As discussed before, the tax owed to the government depends on the income or expected income of the taxpayer. To help simplify this process, the IRS provides a free tax withholding estimator on their website. A link to this tool is provided below:
Taxes must be paid and never purposely dodged. The penalty for purposeful tax evasion is quite punitive with imprisonment and massive fines being the most likely result. However, the IRS understands not all improper tax practices are intentional. Accidents will happen, so the IRS has created a less punitive system of consequences for those who unintentionally file improper tax payments. A common consequence is a payment penalty of 20% of the underpayment.
Should It Stay or Should It Go?
When it comes to the choice of paying estimated taxes when it is not required by law, the most appropriate solution for an individual is based on their own personal preferences and their current financial situation. If you prefer to have more capital on hand for spending/investing and income is precarious, you may prefer not to pay estimated taxes. This would keep your capital more liquid and available for new opportunities and or problems that may arise in life at the cost of potential penalties and interest on the underpaid estimates. On the other hand, if you are risk-averse with a secure financial situation, you may prefer to pay estimated taxes and avoid lump sum payments and more complicated filings come Tax Day.
If you have any questions regarding estimated taxes or general accounting questions, please call the professionals of Barnard Vogler & Co., at 775.786.6141 or visit our contact form on our website, http://bvcocpas.com/contact-us/.