(Note: The possibility of a penalty is very real and apparently increasing. The number of taxpayers who were penalized increased nearly 40 percent from 7.2 million to 10 million filers between 2010 and 2015 according to IRS data analyzed by The Wall Street Journal, or nearly 33 percent from almost 7.5 million to nearly 10 million filers between fiscal years 2007 and 2016 according to a similar analysis by USA Today.)
Estimated taxes must be paid on income you receive that is not subject to withholding as long as the amount exceeds $1,000. There are also circumstances that would require one to pay estimated taxes in the event withholding on earned income was insufficient. Proper planning is paying the correct amount as payments are due on April 15, June 15, September 15, and January 15, unless any of these fall on a weekend or holiday.
If less than the correct amount is paid through withholding and/or estimated tax payments, a penalty and interest charge may apply, even if your overall taxes are overpaid for the year.
How To Determine the Estimated Tax Liability
To determine the estimated tax liability, calculate your expected adjusted gross income and applicable deductions to arrive at taxable income. If you are self-employed, also calculate those taxes in addition to the income tax. If your income fluctuates and is received unevenly during the year, you may want to consider “annualizing” your income and making unequal payments.
There are safe harbors one can utilize to minimize or eliminate the possibility of underpayment of tax penalties and interest. The calculation of income tax liability based on interim periods of time or episodic financial events are best handled by you and your CPA. Price CPAs tax and accounting professionals are available to help explore your circumstances and plan the best approach to manage your tax liability. Our purpose is always to make a positive difference in the financial experience of our clients.
Please contact us for more information at www.pricecpas.com or 615.385.0686.