Estimated taxes are commonly paid by those who are self-employed or have unconventional income, such as income from stocks and bonds. Those who are on salary and receive a check from payroll generally pay their estimated taxes through their company; their income tax is withheld from each check and then filed by the business. Those who do not receive salaried checks must complete these calculations and payments themselves.
Who Needs to Pay Estimated Taxes?
Generally, any individual who will be expected to owe taxes of $1,000 or more when a return is filed will need to pay estimated taxes. For corporations, the threshold is lower; corporations must pay if they will owe taxes of $500 or more on their return. Accounting and tax services can make the process of filing estimated taxes much easier, as they can calculate the amount that is likely to be due and make sure that the payments are sent in on time. If estimated tax payments are late, an individual may incur significant penalties when they file their taxes for the year.
Who Doesn’t Need to Pay Estimated Taxes?
Any individual who had no tax liability for the prior year and has been a US resident for that year will not need to pay estimated taxes. Further, those who work in the farming industry have unique qualifications regarding estimated taxes. Anyone who is on payroll and has state and federal withholdings taken out of their paycheck does not need to pay estimated taxes; they essentially already are, but through their employer. Having multiple W-2’s may cause you to owe taxes at the end of the year if your withholdings are not enough to cover your liability.
How Do Estimated Taxes Work?
Estimated taxes are paid on a quarterly basis and are estimated based on the individual’s income and tax bracket. If the individual does not pay enough, they may be charged a penalty.
Generally, if the quarterly estimated tax payments have been correct, the individual will not need to pay any additional taxes on the annual tax return. However, the annual tax return still needs to be filed. If the individual’s estimated tax payments were more than necessary, the individual will get a tax refund. Usually, it’s best to overpay slightly on estimated taxes rather than to underpay.
It is important to note that estimated tax payments are not an additional payment on top of annual tax returns — they are simply a way of paying taxes in advance to avoid a hefty tax bill at the end of the year, in addition to fines and penalties.
Are you wondering whether you need to pay estimated taxes? Contact Dukhon Tax and Accounting today to find out more about when estimated tax payments are needed and what you need to do to get started immediately. With proper tax planning or even a simple conversation with your CPA, you can avoid the surprise of hefty bill on April 15th. There may not be time to change your situation for 2015, but you can start 2016 off right.