Be sure to stay on top of quarterly tax payments

To make sure that individuals pay their federal income taxes, the government requires that sufficient funds are withheld from salaries or else it mandates that the taxpayer pay an estimated withholding amount each quarter.

Estimated tax payments are typically four equal payments that are normally paid on April 15, June 15, September 15 and January 15 of the following year.

The required annual payment is the lesser of 100 percent of the tax shown on the taxpayer’s tax return for the preceding year (the prior year’s tax safe harbor rule) or 90 percent of his or her tax for the current year.

However, taxpayers with adjusted gross income (AGI) in excess of $150,000 are required to pay the lesser of 110 percent of the tax shown on the prior year’s return or 90 percent of their current year tax liability.

Those who do not pay a sufficient amount are subject to an underpayment penalty, which is determined as the federal short-term rate plus 3 percent.

A taxpayer who has failed to pay one of the installments cannot avoid this penalty by simply increasing the estimated tax payment for a later period. Therefore, if an estimated quarterly payment is not made on time, the taxpayer should make that payment as soon as possible since penalties are computed from the installment due date to the payment date.

The most common way to avoid the underpayment penalty is to increase withholding. An employee can ask his employer to withhold additional amounts for the rest of the year and the penalty can be retroactively eliminated because the heavy year-end withholding will be treated as paid equally over the four installment due dates.

There are certain cases in which is a taxpayer is not required to make estimated tax payments. Those are:

  • the individual’s tax for the year is less than $1,000;
  • the individual didn’t have any tax liability in the prior year; or
  • the underpayment penalty may be waived if the underpayment is due to casualty, disaster, or other unusual circumstance and imposition of the penalty is inequitable and against good conscience. Also if the taxpayer retired at age 62 or later, or became disabled, the underpayment penalty can be waived.

The amount of estimated payments depends on the individual’s facts and circumstances. Most states also require estimated tax payments; however, their rules may differ from the federal rules.

If you would like further information about this, please contact us.