The income tax system in the U.S. is operated on a “pay as you go” basis, which means taxes are due as income is earned. For many individuals, this obligation is met simply by having taxes withheld from their paychecks by employers; others, however, must calculate and submit estimated tax payments throughout the year. Here follows a brief overview of when and how to make these payments.
Estimated taxes are an estimate of the tax liability an individual is projected to incur from various income-generating enterprises and sources, including royalties, rental properties, interest payments, dividend payments, and/or a business.
As a general rule of thumb, the estimated tax payment requirement applies only to individuals whose total tax burden is expected to exceed $1,000 in the current tax year and whose income has not already been subjected to tax withholdings.
In addition, new legislation regarding a 0.9% Medicare surtax on wages above the combined $250,000 income threshold for joint filers and a 3.8% surtax on net investment income for individuals above the $200,000 income threshold ($250,000 for joint filers) may have an impact on whether or not estimated tax payments are required.
Estimated taxes are calculated in one of two ways. First, you may pay 100% of your total tax liability from the previous year. Thus, to satisfy your estimated tax obligation for 2014 and avoid penalties, look at your total tax (line 62 on Form 1040) and withholding (line 63) from your 2013 return. Subtract the withholding amount from the total tax amount to arrive at your unfunded tax liability, and then divide that number by four to determine your quarterly estimated tax payments.
Alternatively, you may choose to pay 90% of your expected tax obligation for the current year (110% for higher incomes) if this amount is smaller than the first option.
Estimated taxes must be paid in four equal installments on the following due dates: April 15, June 15, September 15, and January 15 of the subsequent calendar year. Checks made out to the U.S. Treasury may be mailed with an accompanying payment voucher to an IRS service center or submitted online via the Electronic Federal Tax Payment System (EFTPS) website.
If you believe your income tax obligations for 2014 will require the payment of estimated taxes and you are still unsure how to go about calculating the amount of each installment, feel free to contact us today for an immediate consultation.