How Much Estimated Taxes Do I Need to Pay?
Income tax that isn't subject to withholding is usually paid by the estimating tax method. Most times, this is because someone is self-employed, collects alimony or rent, has received money from selling some assets or from winning a prize, or is expecting to see income from interest and dividends.
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Tax Liability
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The first thing you need to do when figuring out the amount of your estimated taxes is find out if you have a tax liability. The Internal Revenue Service wants you to pay estimated taxes if you owed it money from the previous year and if you meet two criteria. The first is that you expect to owe at least $1,000 in taxes for the year after you take away your withholding and tax credits. The second criteria is that you expect your withholding and tax credits to be smaller than 90 percent of the tax shown on your current tax return. Naturally, this applies to self-employed individuals. If a person has wages paid by an employer, he can simply ask his employer to withhold more taxes by filling out a new Form W-4. On the form is a line to enter the amount you want the employer to withhold. Also, if you're self-employed, keep in mind that if you add up all your income and your deductions and there is no tax liability, there is no need to file estimated taxes for the following year.
Penalties
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It's important to know that you don't have to pay estimated taxes. Of course, if you don't, you'll have to pay an estimated tax penalty. The penalty can simply be added to the balance due on your taxes on April 15. The penalty takes what should have been paid on a quarterly basis with what was actually paid and figures out the difference using the current interest rate. In general, an underpayment of $1,000 would come out to approximately $50.
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Previous Year
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The simplest way to figure out your estimated taxes for this year is to pay whatever your tax liability was from the previous year. This is a good way to go because if you use the prior year method, it doesn't matter how much your taxes are when April 15 rolls around. You will not be assessed any interest or penalties.
Current Year
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The other way to figure out your estimated taxes is to pay 90 percent of this year's taxes. If you make less money than you did last year, you definitely won't be subject to any interest or penalties and you probably won't owe any additional tax. Using this method, you have to pay out the 90 percent of the taxes in four equal installments. It's important that you're accurate in your projections, though, because if you wind up earning more than you expected, you might be liable for interest and penalties.
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References
- Photo Credit tax forms image by Chad McDermott from Fotolia.com
