Find A Safe Harbor With Estimated Tax Payments
Estimated tax payments are a worry only for a minority of taxpayers, but they amount to a significant number. Most people do not have to make them because estimated tax is figured for them by the government based on the W-4 forms they submitted to their employer. If their payments are too high or too low, this can be remedied easily by asking the employer for a new form.
The global economy is changing life everywhere and now an increasing number of people earn money apart from or instead of wages. More people start their own business and are self-employed. They file no withholding form and so are in danger of tax penalties if they pay too little during the course of the year.
There are other types of income not affected by withholding. Often homeowners facing tough times will rent out a room in their house. Rental income is subject to taxation but no tax is withheld. Alimony is also taxable, as are unemployment benefits and gifts and prizes. Income from interest or dividends and capital gains from the sale of assets also fall in this category.
Citizens who earn only small amounts outside of regular salaries should not be concerned. Anyone who owes less than a thousand dollars in tax on this type of income will not be subject to penalties. Anyone on the other side of this equation, however, should definitely take this issue seriously and begin figuring and sending estimated tax payments without delay.
Unless the taxpayer lived abroad for a good portion of the year, there is no great difficulty about figuring estimated tax payments. The previous year’s tax return is used as a guide. The total tax owed is divided by four and payments are sent in on the following four days: June 15, September 15, January 15 and April 15. A word of warning may be in order here. On April 15 both the quarterly and the annual payment may be due, so two checks may have to be sent in if any extra tax is owed.
One thing to notice is that these dates are not spaced in equal intervals. Sometimes the gap is two months, sometimes three or even four. But these are the due dates for payments. To pay, simply fill out IRS Form 1040-ES and use the worksheet included in it to figure the payment.
This method of calculating and paying a quarter of the prior year’s tax on each of the due dates is reliable. The government will not assess penalties against those who use it even if they end up owing quite a bit on April 15. For this reason it is referred to as the safe harbor method. For people worried about the shock of a big bill coming due on April 15 (if their incomes have increased), voluntary payments in excess of the amount required are strongly recommended.
This safe harbor is easy to reach and available to everyone who navigates carefully through the waters of estimated tax payments.
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