During the tax year you must prepay a
substantial amount of the taxes you'll owe for that year, or you risk being hit
with an underpayment penalty. If you're an employee, that's usually not a
problem. Your employer will withhold taxes from each paycheck. You can adjust
the amount withheld so that it covers your total tax bill, even if you have extra
income from moonlighting or investments. But if you're self-employed or
retired, you might need to make estimated tax payments.
To avoid a penalty, the total of your
withholding and estimated tax payments must generally be at least 90 percent of
your tax liability for the year, or 100 percent of your last year's tax
liability. There's no penalty if your underpayment is less than $1,000. Special
rules apply to farmers, fishermen, and higher-income taxpayers.
You pay your estimated taxes by making four
payments, due in April, June, and September of the current year, and in January
of the next year. You can't just wait until the last date to pay what you owe.
You must start paying estimated taxes as you earn taxable income. You can
either pay all the tax you owe on each quarter's earnings, or you can pay it in
installments over the remaining periods. But you must be sure to pay enough to
avoid an underpayment penalty for each period. Again, special rules apply to
farmers and fishermen.
Please contact our office if you think you
might need to make estimated tax payments. The quarterly calculations can be
complicated, and we can help you figure out how much you need to pay at each
date.
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