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What You Should Know About Estimated Taxes

Estimated taxes are periodic advance payment of taxes based on the amount of income you earned and the amount of estimated tax liability to be incurred as a result. Assessment of estimated taxes is based on income that isn’t subject to any type of withholding such as self-employment income, dividend income, rental income, interest income, and capital gains. As a rule, you’ll be required to pay estimated taxes on a quarterly basis.

Paying Estimated Taxes

Individuals such as sole proprietors, partners, and S corporation shareholders, are generally required to pay estimated taxes if they anticipate owing tax of $1.000 or more when their return is filed. Corporations are generally required to make estimated tax payments if they anticipate owing tax of $500 or more when their return is filed.

You may be required to pay an estimated tax for the current year if your tax accounted for more zero in the previous year. You won’t be required to make an estimated tax payment for the current year if you meet the following conditions:

  • You aren’t held liable for the previous year’s taxes
  • You were a US citizen/resident for the whole year
  • Your prior tax year covered a 12-month period

The IRS offers various methods that can help you make 2017 quarterly estimated tax payments:

  • You may credit an overpayment on your 2016 tax return to your 2017 estimated tax
  • You may mail your payment with payment voucher, Form 1040-ES
  • You may pay by phone or online (Form 1040-ES instructions, pg 3);
  • You may pay via electronic funds withdrawal with your 2016 e-filed return

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Are You Estimated Tax Compliant?

According to the Wall Street Journal, the number of individuals who’ve underpaid estimated taxes (and penalized) grew by about 40% from 2010 to 2015. The reasons are associated with low penalties and the growth registered in the gig economy. To know whether you are estimated tax compliant, follow these steps:

  1. Find Out if You’ve to Make Payments

If total payments make up $1.000 or more, pay the taxes when you file your return. You won’t be charged any penalties.

  1. Determine the Amount of Each Installment Payment

There’s no penalty if you pay 90% of this year’s taxes through withholding and/or estimated taxes. Also, you can pay 100% of last year’s bill. More nuances exist that should be taken into account.

  1. Figure Out How to Pay Your Taxes

If you’re employed, you can increase withholding to cover additional liability for self-employment income, taxable retirement plan distributions, household employer obligations, and more. If your spouse is employed and wants to increase withholding, you’ll be covered as long as you file jointly. Consider also Social Security benefits and other voluntary withholding options.

The deadline for the 3rd estimated tax payment for 2017 was September 15, 2017. The deadline for the 4th payment for 2017 is January 16, 2018. The 3rd and 4th payments are due by January 31, 2018, for hurricane victims.