This is a friendly reminder that the final estimated tax payment for 2014 is due by January 15.* If you owe estimated taxes, make sure to submit them to the IRS (or your state) in order to prevent an underpayment penalty.
Individuals must pay estimated taxes if all three are true:
- You expect to owe more than $1,000 of tax when you file your return
- Your federal tax withholding is less than 90% of the tax you owe for the year
- Your federal tax withholding is less than 100% of the tax you owed for the previous year (110% if income is over $150,000)
Estimated tax payments should be paid in equal installments to prevent an underpayment penalty at the end of the year. For example, if you believe you will owe $20,000 in taxes for the year, it is best to send the IRS $5,000 each quarter to satisfy the requirement. If you miss an estimated payment deadline, you should send the amount you missed in addition to the amount due. Perhaps you forgot to send in your first estimated payment in the example above. To offset this, you send in $10,000 in the second quarter and pay $5,000 in the third and fourth quarters in a timely matter. Even though you meet your $20,000 minimum payment, the IRS can still assess an underpayment penalty for incorrectly omitting a payment for the first quarter of the year. This is why it is critical to make quarterly payments.
Some individuals, such as self-employed taxpayers or professional gamblers, generate income that can fluctuate throughout the year. In order to match your tax liability to your income, taxpayers can choose to annualize their earnings by quarter. If this is the case, it may be necessary to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts with your tax return. This form provides a schedule to help calculate the amount of estimated tax to pay in order to avoid a penalty.
The deadline is less than a week away, so make sure to do some last minute calculations if you haven’t already done so!
*Although the deadline is January 15, there is an option that allows an extension of time until February 1, but by this date you must file your return and pay any tax owed to the IRS.
