This question is a rather common one and the answer is, “It depends”. The IRS and most states require taxpayers to “pay as you go”. For many of us, that consists of having taxes withheld from our paychecks. In that case, estimates are not required unless you receive other types of income (investments, business income, income from partnerships and S-corporations). For taxpayers who are not solely W-2 wage earners, but receive other forms of compensation, estimates may be necessary.
The federal underpayment/estimated tax penalty is actually interest at the federal rate for underpayments (currently 3%).
For 2015, you could be subject to a federal underpayment penalty if you do not pay in:
- 90% of your 2015 tax or
- 100% or 110% of your 2014 tax (110% applies for high income earners)
* Qualified farmers and fishermen have alternative methods for calculating estimates.
Estimates must be paid in four equal installments to avoid a penalty. Due dates for 2015 estimates are April 15th, June 15th, September 15th, and January 15th. If the estimated tax payment is paid late, penalty is charged from the date it is due until the date of payment. You cannot avoid penalty by doubling up on your next payment, since the penalty runs from the due date of the original payment. If you are a W-2 wage earner with other taxable income, you might be able to avoid an underpayment penalty by increasing your federal withholding. Withholdings are considered to be paid equally throughout the year, regardless of when the tax is withheld.
If you have a spike in income at the end of the year, there are methods to reduce the penalty for not having paid in higher estimates at the beginning of the year. Mention this to your tax preparer if this happens to you.
Coming soon….June 15th estimated tax deadline. Get your checkbook ready unless you are OK with tacking on extra to your tax bill!
http://www.irs.gov/pub/irs-pdf/f1040es.pdf – Federal Tax Voucher