For the next few weeks, we’re running a “Slice of Life” series where we address real-life problems our clients bring us after they’ve filed their taxes (or not). You can read Part 1 of the series here – Slice of Life: I’ve Been Scammed!
SLICE OF LIFE #2: A client calls us and says, “Why do I have to make estimated tax payments? What’s the point?”
Have you ever found yourself asking this deep, soul-searching question?
The answer, sadly, is pretty simple. If you’re required to file quarterly, and you don’t do it, the IRS can hit you with penalties. And you definitely don’t want that.
If you work at a job where taxes are automatically withheld from your paycheck, you don’t have to worry about this. However, if you’re self-employed, or have any type of income from which taxes are not withheld, you’re required to make an estimated tax payment every quarter. Ideally, by the time Tax Day arrives, you’ve already paid most of the taxes you owe.
However, if you haven’t paid quarterly installments on time, or if you haven’t estimated enough each quarter, you may be liable for penalties. The penalty amount depends on how much you owe, and how late your payments were.
Quarterly taxes are due on April 15th, June 15th, September 15th and January 15th. You can click here to access the IRS Estimate Tax Worksheet, which allows you to estimate the correct amount for each quarterly payment. You can also make an educated guess based on how much you owed last year. If you expect to owe more than $1000 in taxes this year, you must make quarterly payments.
Of course, what you really want to know is….
Here’s how the penalties work. If you’re late making a quarterly payment, the IRS can charge you interest on the money you owe for each day that you’re late. The interest rate is tied to the current market rate for interest. If you don’t owe much money to begin with, and you’re only a few days late, your penalty will be very small.
However, if you owe a lot of money for that quarter…. and you’re weeks or months late in paying… that adds up to quite a bit of interest. If you skip a quarterly payment (or two, or three), the penalties will end up costing you a sizeable chunk of cash.
In order to figure out your estimated penalty, you can fill out Form 2210, but it’s so complicated it comes with a whole extra PDF of instructions. Generally, the IRS will just calculate your penalty after you file and then send you a bill.
One final note: There are some cases where penalties can be waived – for instance, if you can prove that the underpayment was caused by some type of casualty or disaster, if you became disabled or retired during the year, or if you have variable income and filed using the annualized method.
But, for the most part: If you don’t file quarterly, you will have to pay penalties. And who needs that?
If you have questions about quarterly taxes, or are not sure how much you owe, give us a call at 844-841-9857, or Schedule A Free Consultation.