Understanding the Importance, Deadlines, and Considerations for Estimated Tax Payments
If you missing the deadline or fail to pay enough tax through withholding or estimated payments can result in IRS penalties. That’s why it’s crucial to understand the ins and outs of estimated tax payments, especially if you fall into the category of self-employed individuals or retirees who don’t have taxes automatically deducted from their regular paycheck.
The pay-as-you-go system for taxes in the United States requires individuals to pay taxes as they earn their income. While most people associate tax payments with their annual federal tax return, making quarterly estimated tax payments throughout the year is equally important. Here are some important things you need to know:
Who must make payments?
If you own a business, have self-employment income, or anticipate alternative minimum tax, you are generally required to make estimated tax payments. Different rules apply to fishers, farmers, higher-income taxpayers, recent retirees, and individuals with disabilities. To determine if you need to make estimated tax payments, you can use the IRS online interactive tax assistant or consult IRS Form 1120-W and Form 1040-ES.
When the payments are due
The first estimated tax payment for 2023 was due on April 18. The upcoming deadline for estimated tax payments is June 15. The period from April 1 through May 31, 2023 is covered with this payment. It’s essential to mark this date on your calendar to avoid penalties.
How much estimated tax you pay
Calculating your estimated tax payments may seem daunting, but a simple rule of thumb can help. Divide your previous year’s tax liability by four. Alternatively, you can use Form 1040-ES, which considers factors such as adjusted gross income, taxable income, deductions, and credits to help you determine the appropriate estimated tax amount. Electronic payment options, such as IRS DirectPay, make paying estimated taxes easy and convenient.
How underpayment penalties and waivers work
Failure to pay estimated taxes can lead to owing more money and potential penalties when filing your tax return. However, certain circumstances may exempt you from underpayment penalties. If you owe less than $1,000 or have paid most of your taxes during the year, you might avoid penalties. Additionally, penalty waivers are available in situations such as being a victim of a major disaster or casualty, being over 62 years old and disabled, or demonstrating reasonable cause for underpayment.
By staying informed and proactive about your estimated tax payments, you can avoid penalties and ensure smooth tax compliance. Remember to consult a tax professional or refer to IRS resources for personalized guidance and accurate information. Consider utilizing marketplaces like IfindTaxPro. You can post your project and find the right tax specialist for your unique situation.
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