Do you get income throughout the year from which no taxes are withheld? If so, did you know you most likely should be paying estimated taxes on a quarterly basis. It doesn’t matter whether the untaxed money comes from a job, investments, alimony or prizes you’ve won, you may face a penalty fine if you fail to pay your estimated taxes on time. With 10 million taxpayers a year facing estimated tax penalties, the IRS offers some simple tips to help prevent a surprise at tax time.
The tax team at Cotton Mather CPA in the North Hills area of Pittsburgh can help you with complicated tax issues and tax payment questions. Contact us today at (412) 931-1617.
According to IRS.gov- People pay taxes on income through withholding on their paycheck or through estimated tax payments. Taxpayers who pay enough tax throughout the year can avoid a large tax bill and penalties when they file their return.
Taxpayers should make estimated tax payments if:
- The tax withheld from their income does not cover their tax for the year.
- They have income without withholdings. Some examples are interest, dividends, alimony, self-employment income, capital gains, prizes or awards.
Here are five actions taxpayers can take to avoid a large bill and estimated tax penalties when they file their return. They can:
- Use Form 1040-ES. Individuals, sole proprietors, partners and S corporation shareholders can use this form to figure estimated tax. This form helps someone calculate their expected income, taxes, deductions and credits for the year. They can then figure their estimated tax payments.
- Use the Withholding Calculator on IRS.gov. This tool helps users figure how much money their employer should withhold from their pay so they don’t have too much or too little tax withheld. The results from the calculator can also help them fill out their Form W-4. Taxpayers whose income isn’t paid evenly throughout the year, can check Publication 505 instead of the calculator.
- Have more tax withheld. Taxpayers with a regular paycheck can have more tax withheld from it. To do this, they must fill out a new Form W-4 and give it to their employer. This is a good option for taxpayers who participate in a sharing economy activity as a side job or part-time business.
- Use estimated payments to pay other taxes. Self-employed individuals can make estimated tax payments to pay both income tax and self-employment tax. Self-employment tax includes Social Security and Medicare.
- Use Form W-4P. Generally, pension and annuity plans withhold tax from retirees’ payments. Recipients of these payments can adjust their withholding using Form W-4P and give it to their payer.
If you have questions on estimated taxes or need help with your tax filing for business or personal taxes, contact the team at Cotton Mather CPA.