Hans Kasper, MS-CPA, PS

Estimated Tax Payments
 

The payment of estimated, quarterly income taxes does not apply to the average person who works as an employee and has income taxes withheld from their payroll check.

However, for those persons who are self-employed, who have investment income, who have rental property, who are owners of "S" corporations or partnerships, or who have other types of income from which no income taxes are withheld, the payment of quarterly estimated income taxes may apply.

The purpose of the quarterly payments is to have money paid in throughout the year so that it has not been spent when the tax return is due on April 15th.  If the payments are not made, then a failure to estimate penalty can be assessed.

If your tax due is less than $1,000, then there are no estimated tax penalties.  If it is greater, then you may qualify for an exemption; otherwise, you will owe the penalty.

There are four primary exemptions that will allow you to avoid the estimated tax penalty. 

• The first is that your tax withholding from your payroll check or your timely paid estimated tax installments for the current year is more than your tax liability (total tax) of the prior year.  If it is, then it doesn't matter if you owe an additional $1,000,000 when you file your return; there will be no estimated tax penalty. 

• The second is that the additional tax due is less than 10% of the prior year's tax liability and all estimated payments have been made. 

• The third is your prior year's income was more than $150,000 and you paid in estimated taxes and withholding of 112% of your prior year's tax liability.

• The fourth is that your estimated payments were made in an uneven manner throughout the year and that you can prove that your income was earned in the same uneven manner.

For most people, if you look at your tax liability for the prior year (total tax) and divide that by four, then that will be your estimated quarterly tax payments for the next year.

The estimated tax payments are due on 4-15, 6-15, 9-15, and 1-15.  If you file a first extension to file your tax return until August 15th or a second extension to file until October 15th, then the estimated payments are still due for the current year even though you do not know what the amount might be.  The best way to handle this situation is to make the same payments as the prior year for the current year or have your tax return prepared on time.

Top of Page This page was last updated on 12/17/2004