What you need to know about estimated taxes

EPredictable tax is the method used to pay tax on income not subject to withholding tax, including self-employment income, interest, dividends, alimony, rents and gains from sale of assets, prizes and awards. You may also have to pay estimated tax if the amount of income tax withheld from your salary, pension or other income is not sufficient.

Individuals and business owners may need to file and pay estimated taxes, which are paid quarterly. The first estimated tax payment of the year is normally due the same day as your federal income tax return.

For tax estimation purposes, the year is divided into four payment periods, and each period has a specific payment due date. For the 2022 tax year, these dates are April 18, June 15, September 15, and January 17, 2023. You do not have to pay estimated taxes in January if you file your 2022 tax return before January 31, 2023, and pay the full balance owing with your return.

If you do not pay enough by the due date of each payment period, you may be assessed a penalty even if you owe a refund when you file your tax return. If you had tax payable for the previous year, you may have to pay estimated tax for the current year. But if you receive wages and salaries, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings.

Who has to pay the estimated tax

If you are filing as a sole proprietor, partner, S corporation shareholder, and/or self-employed, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. If you are filing as a corporation, you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.

Special rules apply to farmers, fishermen, certain domestic workers and certain higher taxpayers. If you fall into one of these categories, you should check with a tax advisor.

You do not have to pay estimated tax for the current year if you meet the following three conditions: (1) you had no tax to pay for the previous year; (2) you were a US citizen or resident throughout the year; and (3) your previous tax year covered a period of 12 months.

Calculation of estimated taxes

To determine your estimated tax, you need to calculate your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. If you estimated your income too high, simply complete another Form 1040-ES, Individual Tax Estimate, using the form’s worksheet to recalculate your tax estimate for the next quarter. If you estimated your income too low, complete another Form 1040-ES worksheet again to recalculate your estimated tax for the next quarter.

If you receive wages and salaries, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on the W-4 form to enter the additional amount you want your employer to withhold. You did not have to pay tax for the previous year if your total tax was zero or if you did not have to file a tax return.

Try to estimate your income as accurately as possible to avoid penalties for underpayment. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after deducting their deductions and credits or if they have paid at least 90% of the tax for the current year or 100 % of the tax indicated on the declaration of the previous year. year, whichever is lower.

When calculating your estimated tax for the current year, it can be helpful to use your previous year’s income, deductions, and credits as a starting point. Use your previous year’s federal tax return as a guide and use the Form 1040-ES worksheet to calculate your estimated tax. However, you must make adjustments both for the evolution of your situation and for recent changes in tax law.

The easiest way for individuals and businesses to pay their estimated federal taxes is to use the Electronic Federal Tax Payment System (EFTPS). You can make your federal tax payments – including federal tax filings, installment agreements, and estimated tax payments – using EFTPS.

If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc., you can do so, provided you have paid enough at the end of the quarter. By using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.

This has been a brief discussion on a complex subject and should not be taken as specific advice. Always consider seeking professional tax assistance.

Norman G. Grill is Managing Partner of Grill & Partners LLC, chartered public accountants and consultants to private companies and high net worth individuals, with offices in Fairfield and Darien.

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