June 13, 2013

According to the IRS website, estimated tax, paid four times a year, is a way for certain individuals to make sure they are compliant with tax obligations. The second-quarter June 17th tax deadline is coming up fast, so some preparation may be in order.

What is the Purpose of Estimated Taxes?

The purpose of estimated taxes is to make sure the government gets a constant flow of tax revenue. Since the U.S. tax system functions on a “pay as you earn” basis, paying on a quarterly basis enables revenue to flow smoother than a once-a-year payment. IRS Form 505 spells out all of the intricacies of filing and paying estimated taxes in 2013.

While self-employment income constitutes the majority of estimated taxes, the tax liability for other sources of income can be estimated and filed on a quarterly basis. Other types of income include: alimony, asset sales, prize, non-withheld salary, pension payments and lottery winnings.

When is the Deadline?

While IRS Form 1040-ES has the official deadline as June 15, 2013, it is pushed back to the next business day Monday, June 17th because the 15th is a Saturday. The third-quarter estimated tax deadline is September 16, 2013, and the fourth is January 15, 2014.

Who is Impacted?

  • Generally speaking, self-employed individuals are affected.
  • Individuals who have had estimated tax liabilities in previous tax years.
  • Individuals working as a sole proprietor or business partner, a S-corporation shareholder or under any other type of self-employed circumstances are expected to pay quarterly estimated taxes if they project annual taxes of $1,000 or more per year.
  • IRS regulations stipulate that if you are filing as a corporation and you project you will have an annual tax obligations of $500 or more per tax year, you will have to make estimated payments.

How are Estimated Taxes Calculated?

Estimated taxes are determined by looking at projected revenue, expenses, deductions and credits for the tax year. Basing each quarter’s payments may be easier by looking at last year’s annual and quarterly payments. Depending on the actual figures, you may need to pay more or less for each quarter compared to last year’s estimated taxes. IRS Form 1040-ES has forms to recalculate over and under-payments.

What are Consequences of Underpayment?

If estimated taxes are underpaid for one or more quarters, penalties and interest will be assessed on any unpaid estimated taxes.

Generally speaking, filers with underpayment of estimated taxes will either be billed by the IRS or can file IRS Form 2210 to determine what is owed. However, there are circumstances that may provide taxpayers the ability to avoid this tax if one of the following criteria is met:

  • If estimated taxes are less than $1,000 for a tax year, after taking away their withholdings and credits; or
  • If at least 90 percent of the estimated taxes for the present tax year are paid, penalties may not be applicable; or
  • If all of the taxes shown on the previous year’s tax return are paid in full.
  • Many businesses, especially start-ups may be able to avoid this penalty by projecting their income across all four quarters for estimated tax purposes.
  • Payments that were not made due to a death, natural disaster, or other uncontrollable factors allowed by the IRS may permit filers to avoid the penalty
  • Disabled or retirees (after turning 62) who attained this status and failed to make appropriate payments during the present or past tax year may be able to avoid the penalty if not due to purposeful causes.

How can Estimated Taxes be Paid?

Payment options are very flexible. Each estimated tax quarter can be paid via check and the appropriate voucher from the Form 1040-ES package. Forms can be filed electronically and paid via a credit card. The IRS also has its own Electronic Federal Tax Payment System that enables taxpayers the ability to log in and pay each quarter’s estimated taxes.

How Optima Tax Relief Can Help

Claiming income and filing taxes for your business or eligible income can be tricky. Since there are many regulatory intricacies that must be followed to ensure there is full compliance, Optima Tax Relief can assist you with your estimated tax estimation and remittance needs. Don’t wait another quarter, the June 17th tax deadline is next Monday. Optima Tax Relief can help you with this quarter’s and future quarter’s estimated tax payments. Schedule a consultation with a representative from Optima Tax Relief today!