Paying Estimated Taxes
You can keep up with paying your taxes during the year in one of two methods, paycheck withholding or quarterly payments.
When And How To Pay Estimated Taxes:
For paycheck withholding you simply submit your w-4 to your employer with the desired withholding percentage to be withheld. This can be adjusted from time to time to ensure your not paying in too much or too little. Too little can result in penalties.
For estimated income tax payment purposes, the year is divided into four quarterly payment periods. Each quarterly payment has a specific due date. If you do not pay enough taxes by the due dates of each quarterly period, you may be charged penalties and interest, even if you are due a refund when you file your federal income tax return.
Income Tax Underpayment Penalties:
If during the year you did not pay enough in income tax payments throughout the year, either through tax withholding or by making estimated tax payments, you may be subjected to an Internal Revenue Service (IRS) underpayment penalty.
In general, most taxpayers will be able to avoid this penalty providing that they owe less than $1,000 in taxes after subtracting taxes and credits made through withholding or quarterly payments. Other scenarios that help to avoid penalties include:
- If you paid at least 90% of the taxes owed for the current year, or if you paid 100% of the tax amount shown on your previous years federal tax return, whichever is smaller.
- In some situations, special rules apply for farmers and fishermen. Refer to Publication 505, Tax Withholding and Estimated Tax, for additional information on this matter.
Avoiding Underpayment Tax Penalties:
If your income is received unevenly during the year, you may be able to lower or even avoid any penalties by annualizing your income and making uneven quarterly payments. Use IRS Form 2210, (Underpayment of Estimated Tax by Individuals, Estates, and Trusts), to determine if you will owe an underpayment tax penalty.
Should you owe a penalty, refer to the IRS Form 1040 or 1040A Instructions for information on where to report the estimated tax penalty on your tax return.
You may also be able to avoid penalties if:
1.) Your failure to make proper estimated tax payments was caused by a casualty, disaster, or other uncontrollable circumstance making it inequitable to impose the penalty.
2.) You became disabled or retired (after reaching age 62) during the tax year for which estimated payments were required to be made.
3.) If your underpayment was due to unfortunate or reasonable cause and not willful neglect.
Use IRS Form 2210 to request a waiver of the penalty for any reasons shown above.
How to Pay Federal Income Taxes:
Using the EFTPS electronic payment system is by far the easiest way to pay your federal income taxes for individuals and businesses alike.
You can make all federal tax payments using the Electronic Federal Tax Payment System, Including:
- federal tax deposits (FTDs),
- installment agreement payments
- estimated tax payments
You can make estimated tax payments weekly, bi-weekly, monthly, etc. so long as you have paid the total proper amount by the end of each quarter.
The EFTPS system allows you to access your payment history to see how much and when you made each of your estimated tax payments.