Newsletter – April 2013
Estimated Tax Payments
If you are self-employed or if you have a significant investment income you may be required to pay quarterly estimated tax payments. Typically if you expect your current year income tax liability to exceed $1,000 you will be required to make estimated tax payments. If your current year tax liability is projected to be less than $1,000 you will not be required to make estimated tax payments.
Exceptions
You will not have to make estimated tax payments if you pay at least 90% of your current year income tax through withholding. For example, if you project your current year income tax to be $20,000 you will not be required to make any estimated tax payments as long as you have paid at least $18,000 in withholding or other payments. The other exception is if you pay in the current year at least 100% of what the previous year tax was then you will not be required to make any estimated tax payments. For example, if the previous year income tax was $2,000 and you pay at least $2,000 through withholding or other payments in the current year, then you would not be required to make any estimated tax payments even though your current year income tax is greater than $2,000.
Penalties
If you are required to make estimated tax payments but fail to do so you will be assessed a penalty. The penalty is based on the amount of tax that you owe on your tax return. The penalty is calculated by taking into account the quarterly estimated tax payments that should have been made based on the current year income tax. The required estimated tax payments that should have been made are then subtracted from the difference in payments that were actually made and those differences are then multiplied against the federal applicable interest rate to calculate the penalty.