Tax Penalties – How to avoid them.

This guide was developed by Metro Accounting And Tax Services, CPA to aid individuals and business owners avoid tax penalties via the payment of estimated taxes. It is said that there are two things that are unavoidable in life, that is death and taxes. Taxes must be paid as you earn or receive income during the year, this is done either through withholding or through estimated tax payments.

If there is a shortfall in the payment of your taxes, whether due to the fact that the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments. Self-employed persons are also generally required to make estimated tax payments. Estimated tax payment covers income tax and other taxes such as self-employment tax and alternative minimum tax.

You may be assessed a tax penalty if you don’t pay enough tax through withholding or estimated tax payments. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.

Who Must Pay Estimated Tax

If you expect to owe taxes of $1,000 or more when your return is filed, you generally have to make estimated tax payments. This goes for Individuals, including sole proprietors, partners, and S corporation shareholders.

Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed. For the current year you may have to pay estimated taxes if the prior year tax was more than zero.

Who Does Not Have To Pay Estimated Tax

Wage and salary earners can avoid having to pay estimated taxes by asking their employer to withhold more tax from their earnings. This change is done via Form W4. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.

You don’t have to pay estimated tax for the current year if you meet all three of the following conditions.

  • You had no tax liability for the prior year – your total tax was zero or you didn’t have to file an income tax return.
  • You were a U.S. citizen or resident for the whole year
  • Your prior tax year covered a 12-month period

Figuring Your Estimated Tax

To figure your estimated tax, Form 1040-ES is used for individuals, including sole proprietors, partners, and S corporation shareholders.

Your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year are taken into consideration.

It may be helpful to use your income, deductions, and credits for the prior year as a starting point. You need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high in one quarter, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. Similarly, if you estimated your earnings too low in one quarter, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. It is imperative that you estimate your income as accurately as you can to avoid penalties.

It is important to note that you must make adjustments both for changes in your own situation and for recent changes in the tax law.

Corporations generally use Form 1120-W to figure their estimated tax payments.

When To Pay Estimated Taxes

For estimated tax purposes, the year is divided into four payment periods. For each period payment can be made to the IRS online, by phone, or by mail.

Using the Electronic Federal Tax Payment System (EFTPS) is the easiest way for individuals as well as businesses to pay federal taxes. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using this system. It might be easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. as long as you’ve paid enough in by the end of the quarter. The EFTPS also allows you to view a history of your payments, so you know how much and when you made your estimated tax payments.

Corporations are required to use the Electronic Federal Tax Payment System for all estimated tax payments.

Penalty for Underpayment of Estimated Tax

You may have to pay a penalty if you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments.

The penalty may also be waived if:

  • The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
  • You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

For guidance with all your accounting and tax matters, don’t hesitate to call the office 470-240-5143. We’ll provide you with knowledgeable expert advice to help you make the right decision and avoid tax penalties.

User | 28/10/2017