SRJ Consulting - Pay Estimated Taxes and Avoid Underpayment Penalty - ;Will save you money, time, and hassle by giving the best tax accounting services. Credentials: IRS licensed Enrolled Agent, Chartered Accountant, and Master?s in Accounting from Univ. of IL at U-C.


	Back to Tax News
Pay Estimated Taxes and Avoid Underpayment Penalty

You can be hit with penalties for underpayment if your total taxes due, when you file your return, is $1,000 or more. However, here are "safe harbors" that can help protect you from underpayment penalties even if the amount you owe is $1,000 or more:

You can avoid underpayment penalties if your total withholding and estimated payments are at least 90% of the total tax for this year.
You also can avoid underpayment penalties if your tax withholdings are at least equal to the total tax for previous year. (If you have adjusted gross income of more than $150,000, you'll have to pay 112% of your total tax previous year to qualify for this safe harbor.)

A common reason taxpayers get hit with IRS penalties for under withholding is that they neglect to take their capital gains into account when figuring how much tax to withhold. If you have income not ordinarily subject to withholding, things like self-employment income or capital gains from stock or mutual fund sales, you may need to send additional money to the IRS.

There is no penalty if you had no tax liability for previous tax year (assuming you were a U.S. citizen or resident for all of previous tax year, and your previous tax year included 12 full months).

A penalty can be abated for what is known as reasonable cause. The IRS Regulation 301.6651-1(c) provides that:

"if a taxpayer exercised ordinary business care and prudence and was nevertheless either unable to file the return or pay within the prescribed time, the delay is due to reasonable cause."

Pay quarterly estimated tax payments: The easiest way to make sure you don't get penalized by the IRS for an underpayment of estimated tax for the year 2002 is to make sure that the amount sent to the IRS each quarter through any combination of withholding and estimated payments is at least equal to one-fourth of your year 2001 income tax liability. Note: if you have adjusted gross income of more than $150,000 ($75,000 if you are married filing separately), you'll need to pay in one-quarter of your 2001 liability, plus an additional 12%.

If you've fallen behind on your payments for the year, you can stop the interest clock from running by making an estimated payment that brings you up-to-date with your liability. You then wouldn't owe any interest going forward, but you would still wind up paying interest on the amounts that were underpaid in the previous months.

The government looks at payroll withholding as having been done equally throughout the year, no matter when it was actually done. So if you receive payroll checks, you can make up earlier underpayments by adjusting your paycheck withholding for the last few months of the year.

A note of caution: try not to pay too much. It is better to owe the government a little rather than to expect a refund. After all, the IRS charges around 6% interest on underpayments, which is better than the average credit card. The IRS doesn't give you dime when it borrows your money.

How do I calculate the amount of estimated tax I will owe?

You should get Form 1040-ES, Estimated Tax for Individuals, to help you figure your estimated tax liability.

When are the quarterly estimated tax returns due?

You can't cover yourself against underpayment penalties by just waiting until the end of the year and then making a large estimated tax payment. The government (federal and state) wants to get payments for taxes you'll owe on at least a quarterly basis — on April 15, June 15, Sept. 15 and Jan. 15 (the January payment is for the fourth quarter of the previous year).

Filers subject to corporate income tax face similar rules, except that their estimated taxes are due on the 15th day of the fourth, sixth, ninth and 12th months in their fiscal year. For corporations that are calendar-year taxpayers, this translates to quarterly filing dates of April 15, June 15, Sept. 15 and Dec. 15.

If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or legal holiday. For example, a payment due Sunday, April 15, 2001, will be on time if you make it by Monday, April 16, 2001.

Can I make my quarterly individual estimated tax payments by credit card?

You can generally pay part or all of your estimated tax by using a credit card (American Express Card, MasterCard, or Discover Card). There are two credit card processors (also referred to as service providers) which offer this service: Official Payments Corporation and PhoneCharge, Inc. Both providers will charge you a convenience fee using a tiered fee schedule which can be found on their web sites. The IRS will not receive this fee. By phone, Official Payments Corporation can be reached at 1-888-272-9829 (1-888-2PAY-TAX) toll-free. Similarly, you may call PhoneCharge, Inc. at 1-888-255-8299 (1-888-ALL-TAXX). You will be told the amount of the convenience fee during the call. Then, you will have the option to continue or cancel the call. If you decide to continue, you will be given a confirmation number at the end of the call. Make a record of the confirmation number. Do not include the amount of the convenience fee as part of the estimated tax payment. There is nothing to send in when you pay by credit card.

Is there a way to have federal income tax withheld from unemployment compensation, in lieu of making estimated tax payments?

You may have federal income tax withheld from unemployment compensation by filing Form W-4V, Voluntary Withholding Request.