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When Must Individuals Pay Estimated Taxes?

October 28, 2015

Alan T. Huberman, CPA, MST
Partner

Individuals are required to make federal estimated tax payments if the amount of tax that they pay through withholding on wages and other payments will not adequately cover their tax liability for the year (individuals should also consider any state tax rules regarding the payment of estimated taxes). Many federal income taxes are paid from amounts that are withheld from payments made to the taxpayer. For instance, amounts roughly equal to an employee's estimated tax liability are generally withheld from the employee's wages and are then remitted to the government by the employer.

In contrast, estimated taxes are taxes that are paid throughout the year on income that is not subject to withholding. Individuals must, therefore, make estimated tax payments if they are self-employed or their income derives from interest, dividends, investment gains, rents, alimony, IRA/pension distributions or other income that is not generally subject to withholding.

Estimated taxes are used to pay income and self-employment tax for the tax year, as well as other taxes reported on the taxpayer’s return, including the 3.8% tax on net investment income and the .9% additional Medicare tax, less any estimated credits against tax.

Due Dates.For most individual taxpayers, the quarterly estimated tax payments are due April 15, June 15, September 15 and January 15 (of the following year).

As 2015 begins to wind down, the first responsibility of the calendar-year taxpayer is to review payments of estimated tax for 2015 to ensure that the tax payments and the income tax withheld from wages during the year are sufficient to avoid penalties.  The 2015 estimated tax payments, plus income tax withheld from wages, are credited against tax due for 2015.  Any underpayment of tax must be made up by a payment with the final return, and any overpayment is either refunded or credited against the estimated tax for the next year.

Penalties. While the law does not directly impose an obligation to pay estimated taxes, it does impose a penalty on individuals for failure to pay enough tax either through withholding or estimated taxes, or if the payments are made late.  However, the IRS may waive the penalty if the underpayment was due to casualty, disaster or other unusual circumstances.

To avoid the penalty, an individual must generally make four (4) required installment payments of estimated taxes based on his/her required annual payment.  In general, each installment is equal to 25% of the lesser of:

  • 90% of the tax shown on the individual’s tax return for the current year, or
  • 100% of the tax shown on the prior year's return (110% in the case of an individual with adjusted gross income over $150,000; $75,000 for married individual filing separately), unless the prior year was not a 12-month period.

U.S. citizens who do not have any tax liability for the current year are not required to make estimated tax payments.

Generally, as noted above, the required installment is equal to 25% of the required annual payment. However, a taxpayer who receives taxable income unevenly throughout the year can elect to pay either the required installment amount or an amount based on the annualized income installment method. The use of the annualized income installment method may reduce or eliminate any penalty for underpaid taxes.

Form 1040-ES.Taxpayers use Form 1040-ES to calculate, report and pay their federal estimated tax. The annual liability may be paid in quarterly installments that are due based upon the taxpayer's tax year. However, no payments are required until the taxpayer has income upon which tax will be owed. Taxpayers may also credit their overpayments from one year against the next year's estimated tax liability, rather than having them refunded.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein.  Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities.  This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

 

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