The Estimated Taxes & Taxpayer's Duties
1. The Federal Tax System and State Tax System are Pay-As-You-Go systems so your income taxes must be paid as you earn or receive income during the year, either through Salaries/Wages (W-2) withholding and/or estimated tax payments. Per IRS Publication 505 (Tax Withholding and Estimated Tax), Individuals and Sole Proprietors, Partners, and S-Corporation Shareholders, are required to make their estimated tax payments quarterly if they expect to owe tax of $1,000 or more at the end of a tax year (by December 31st) before the tax returns for that year are filed. Corporations have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed. If you don’t pay enough taxes through your W-2 withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
2. The Federal and State Taxing Authorities have strictly enforced penalties for taxpayers for not paying sufficient estimated taxes throughout the tax year. In general, most taxpayers, at the time of tax filings, may avoid penalties if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they had paid (by December 31st) at least 90% of the tax for the current year or 100% of the tax shown on the prior year return, whichever is smaller. If the amount tax due is large, taxpayers may be charged with other penalties. Those penalties may include but not limited to late payment penalty, underpayment penalty, interests, etc. In some situations, the combined amount of all penalties plus interests is large enough to shock taxpayers when taxpayers do not comply with tax laws. Some taxpayers cannot pay off all tax debts at one time. Over the time, their tax burden grows larger. Please be advised that it is taxpayer’s duties if they owe taxes to pay their estimated taxes every quarter on time.
3. When you own a business (Sole Proprietorship, LLC, Partnership, S-Corporation) and/or earn income in any forms or obtain capital gains throughout the year, these requirements are crucial because nobody else but you to withhold and pay Federal & State income taxes and Medicare or Social Security taxes for you. Unless you have set up an adequate and effective payroll system along with submitting sufficient quarter estimated income taxes to Federal and State Taxing Authorities, you are sometimes short of tax dues at the end of tax year. This requirement applies to any taxpayers who expect to sell stocks, properties or businesses with capital gains. Taxpayers should be in compliance with Federal and related State tax laws. If you are unsure of what to do with your situation, consult and engage a tax planning or tax projection with our licensed tax advisors. As your trusted practicing tax professionals, we provide tax advices, planning and guidance to help you resolve and go through your complex tax situation.
Do You Withhold Enough Taxes?
Below are some guidance for using these programs from IRS Tax Withholding Estimator Website and California Franchise Tax Board Tax Calculator Website:
Have your most recent pay stubs from all income sources handy.
Have your most recent income tax returns handy.
Have your most correct net profit from your business if you have a business.
Estimate values if necessary, remembering that your results can only be as accurate as the input you provide. The estimates are only estimated figures.
To Change Your Withholding:
Use your results from this calculator to help you complete a new Form W-4, Employee's Withholding Allowance Certificate. Contact your Employer.
Submit the completed forms to your Employer. If you need more tax withholding, either for Federal or State or both, add more in separate line.
It is for best result you have an effective tax planning with your tax advisor if you expect to have additional income or some taxable transactions such as property sales, capital gains or stock options or any equity gain sales. Plan with your trusted tax advisor to find out more accurate withholding amounts so you won't be too much or too little tax withholding when it is time to file your income taxes.