You may have to pay a penalty in the form of interest on the underpayment for the period when the underpayment occurred. The penalty is figured separately for each payment period, and you may owe a penalty for an earlier payment period even if you later paid enough to make up the underpayment. As a matter of fact, if you didn't pay enough tax by the due date of each of the payment periods , you may owe a penalty even if you are due a refund from the IRS when you file your income tax return. Cherilyn is employed as a teacher and runs her own tutoring business as well.
She didn't make any estimated tax payments during last year because she thought she had enough tax withheld from her teaching wages.
However, Cherilyn will owe a penalty through January 11 of this year for her underpayments for the first three quarterly payment periods. She won't owe a penalty for the fourth quarter because she made a payment for the quarter by the January 15 due date. You can request a waiver of the penalty if the underpayment was caused by a casualty, disaster, or some other unusual circumstance that would make its imposition unfair.
The IRS may also waive the penalty for reasonable cause during the first two years after a taxpayer retires upon reaching age 62 or becomes disabled. You can use Form to calculate your estimated tax penalty. But this form is very complicated, and generally, you aren't required to complete it. When you file your tax return, the IRS will usually figure the penalty for you and send you a bill.
Depending on what you pay your tax pro, it may be more beneficial to you to let the IRS do the calculations. The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. You can do this either through withholding or by making estimated tax payments.
If you didn't pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. There are special rules for farmers and fishermen, certain household employers and certain higher income taxpayers. Usually, that's enough to take care of your income tax obligations.
But if you are self-employed or make money on your investments or rental property, you may need to make estimated tax payments every quarter, rather than wait until you file your annual tax return. Here's how estimated taxes work. Note: If you are a farmer or a fisherman, replace the 90 percent shown above with Most people pay just over percent of their prior-year income tax liability, as long as their business income doesn't change dramatically.
But even if you pay percent or percent if your income is high enough of your prior year's tax, if your business income has increased substantially, you may discover that you still owe more money to the IRS when you prepare your income tax return, even though you might be exempt from the estimated tax underpayment penalty. If you find yourself in this situation, a good choice is to pay additional estimated taxes ahead of time, to avoid a nasty bill at tax time.
However, this might limit the amount of money to use in your business until your tax return is due. Another idea is to make sure you plan ahead to have the necessary cash to pay your tax bill when you file. Just be careful because not being able to pay your total tax bill can lead to penalties and interest. After you start paying estimated taxes, be sure to keep a separate record of the dates you paid them and how much you sent for each period.
If you don't keep accurate records, it can take you longer to prepare your income tax return, and you may miss one or more of the payments you made. If you pay estimated taxes, be sure to claim credit for them when you file your tax return. Form ES includes a worksheet to help you determine your estimated tax. Never accused of oversimplifying things, the IRS doesn't break the tax year into four three-month quarters.
The first quarter is three months January 1 to March 31 , but the second "quarter" is two months long April 1 to May 31 , the third is three months June 1 to August 31 and the fourth covers the final four months of the year.
The installment payments are typically due on April 15, June 15, and September 15 of the current year and then January 15 of the following year. You can skip the final payment if you will file your return and pay all the tax due by February 1.
If a due date falls on a weekend or legal holiday, the deadline is pushed to the next business day. You don't have to make any payment until you have income on which estimated taxes are due. But what if you receive income during the third quarter that, for the first time, makes you liable for estimated tax payments?
You will need to use IRS Form to show that your estimated tax payment is due because of income during a specific time of the year.
If not, the IRS assumes that you had the income throughout the year and simply underpaid your estimated tax.
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