It’s tax time! My “Ask An Accountant” series should help with many questions that may arise. Remember, if you have a tax question, email my husband who is an experienced accountant at email@example.com.
Do I need to pay estimated taxes?
You may need to pay estimated taxes to the IRS during the year if you have income that is not subject to withholding. This depends on what you do for a living and the types of income you receive.
1. If you have income from sources such as self-employment, interest, dividends, alimony, rent, gains from the sales of assets, prizes or awards, then you may have to pay estimated tax.
2. As a general rule, you must pay estimated taxes in 2012 if both of these statements apply: 1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and tax credits, and 2) You expect your withholding and credits to be less than the smaller of 90 percent of your 2012 taxes or 100 percent of the tax on your 2011 return. Special rules apply for farmers, fishermen, certain household employers and certain higher income taxpayers.
3. For Sole Proprietors, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
4. To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, for this. You want to be as accurate as possible to avoid penalties. Also, consider changes in your situation and recent tax law changes.
5. The year is divided into four payment periods, or due dates, for estimated tax purposes. Those dates generally are April 15, June 15, Sept. 15 and Jan. 15 of the next or following year.
6. Form 1040-ES, Estimated Tax for Individuals, has everything you need to pay estimated taxes. It includes instructions, worksheets, schedules and payment vouchers. However, the easiest way to pay estimated taxes is electronically through the Electronic Federal Tax Payment System, or EFTPS. You can also pay estimated taxes by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.
Please keep in mind this post is for informational purposes only and answers given are very general. Do not rely on this column for definite tax answers as many things depend on individual circumstances. Please contact your personal accountant or financial advisor for your particular situation.
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IRS Circular 230 Notice: Any U.S. tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions