This seems to be my week to work with people needing an offer in compromise (OIC). Why am I bringing up OICs when we plan to talk about estimated taxes? Because in order to cut any deal with the IRS, you must first be in compliance. You must be paying taxes for the current year with either enough money withheld from your paycheck or the right amount of estimated (ES) tax payments.
Must you make ES payments?
You do not need to make ES tax payments if most of your income comes from a job. You can structure your withholding, using Form W-4, to ensure that you pay enough into the tax kitty to cover your tax obligations.
You also don’t need to make ES tax payments if your income comes from pensions, unemployment, or Social Security payments. You can easily arrange to have withholding taken if your income is taxable. Use Form W-4P for pensions and Form W-4V for Social Security. For unemployment, contact your unemployment department; check with your state for the corresponding documents.
However, when a substantial part of your income comes from a profitable business or investments without deductions for withholding, expect to pay.
Make ES payments if:
1. You expect to owe $1,000 or more on April 15 after subtracting your withholding and refundable credits.
2. You expect your withholding and refundable credits to be less than the smaller of:
- 90 percent of the tax to be shown on your 2012 tax return.
- 100 percent of the tax shown on your 2011 tax return. Your 2011 tax return must cover all 12 months. (If your AGI for 2011 was more than $150,000, or $75,000 if your filing status for 2012 is married filing a separate return, substitute 110 percent for 100 percent.)
You are off the hook for ES payments if your tax liability last year was less than $1,000.
When should you make ES payments?
Tax payments are due as follows, unless the due date falls on a weekend or holiday—then, your payment is due on the next business day.
Q1 – April 15
Q2 – June 15
Q3 – September 15
Q4 – January 15
Farmers may pay the full amount on January 15, or, if they file their tax returns by March 15, they may pay the full balance on that date. Read the special rules for farmers paying taxes.
How to pay ES taxes
The easiest way to pay ES taxes is to use the IRS’s Electronic Federal Tax Payment System (EFTPS). It’s free, the payments come directly out of your bank account, you get proof the payment has been made, and you can ensure the payment is applied to the correct tax year and type of tax. In addition, you can print a summary of all the payments at the end of the year to use with your tax return.
If you are sure there will always be enough money to cover the transfers on the payment date, schedule the payments. Otherwise, do not do this—un-scheduling is a nightmare.
Naturally, there are other ways to pay your taxes. Beware, though. Several of those options, including online credit card systems, money orders, and so on, may require you to pay additional fees.
Why should you make estimated tax payments at all? Because if you don’t, you’ll needlessly waste your money paying penalties.
Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.