Paying lump-sum taxes can be a huge burden on one’s cash flow. To prevent such a scenario, the U.S. Internal Revenue Service (IRS) encourages taxpayers to make estimated advance instalment tax payments.
Generally, taxes must be paid as you earn or receive income during the year. For employees, the employer withholds taxes from their wages and remits them to the IRS. Self-employed individuals, partners in partnerships, members of S-corporations or LLC’s and those earning large investment incomes, however, need to estimate their tax liability and remit advance tax payments on a quarterly basis. These estimated tax payments not only include the federal income tax payment but also self-employment tax and alternative minimum tax.
If an individual does not have enough withholding tax or estimated tax payments remitted during the year, this could lead to penalties being charged by the IRS. Additionally, payments not made on time may also result in penalties even if a refund is due.
It is important to accurately estimate the advance tax payments and tax withholding since although the IRS refunds excess tax withholding, a refund means that you are receiving less after tax income per month. A taxpayer could use this extra income to fund their retirement savings or financial goals, apply additional payments toward their debts, or simply spend it. For example, a tax refund of $1800 could put $150 per month in your pocket throughout the year.
The following are some points that may assist you in estimating your U.S. advance tax payments and withholdings.
U.S. Estimated Tax Payments & Withholding
U.S. taxpayers, such as self-employed individuals and corporations, are required to make estimated tax payments if they expect that they will owe $1,000 (individuals)/ $500 (corporations) or more when filing their annual federal income tax return.
Employed individuals need to inform their employers about the amount to withhold from their salary or wages. The amount is determined by completing Form W-4, Employee’s Withholding Allowance Certificate and providing the form to your employer.
How To Estimate The Advance Tax Payments or Withholdings
An easy way to arrive at the amount of taxes due in 2018 is to rely on your 2017 income tax return. If when filing your annual income tax return, you owe the IRS an additional amount, you should consider increasing your advance tax payment or withholding by that amount.
On the other hand, if there was a significant tax refund on the previous year’s return, review your tax return and if you will be getting a similar income amount and qualifying for the same tax refunds and credits, you may reduce your advance tax payments or withholding amount.
If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.
If you are not employed or want to make payments personally, use the worksheet in Form 1040-ES, Estimated Tax for Individuals, or Form 1120-W, Estimated Tax for Corporations, to calculate how much you must pay in estimated tax.
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. Adjustments should be made both for changes in your own situation and for recent changes in the tax law.
U.S. Estimated Tax Payment Dates
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date.
For individuals, the dues dates for 2018 are:
- April 18;
- June 15;
- September 15; and
- January 16, 2018.
If you don’t pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you’re due a refund when you file your income tax return. See the Underpayment of Estimated Tax section below for more information.
U.S. Estimated Tax Payment Methods
Individuals may pay their taxes, online, by phone or through the mail.
Corporations are required to use the IRS’ Electronic Federal Tax Payment System (EFTPS) to pay federal taxes, including federal tax deposits (FTDs), installment agreement and estimated tax payments.
During the quarter, it is upon the taxpayer to determine if they want to pay their estimated taxes weekly, bi-weekly, monthly, or as lump sum. It does not matter as long as you’ve paid enough by the end of the quarter.
Individuals using EFTPS, can access a history of their payments, so they know how much and when did they make the estimated tax payments.
Penalty for Underpayment of Estimated Tax
If you did not pay enough tax throughout the year, either through withholding or estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting the tax withheld and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.
Note that if your Adjusted Gross Income (AGI) for 2016 was more than $150,000 ($75,000 if your filing status for 2017 is married filing a separate return), you must pay 110% of your 2016 taxes rather than the 100% discussed above.
However, if your income is received unevenly during the year (for example, you have a large capital gain later in the year), you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. The penalty may also be waived if the individual failed to make estimated payments due to unforeseen situations such as: a disaster, or a disability.
Taxpayers, who had no tax liability for the prior year may not need to make advance payments . Special rules also apply to fishermen and farmers. These taxpayers should consult a tax professional or visit the IRS website for further information.
With modifications to the tax rules announced end of 2017, it is highly recommended that taxpayers re-estimate their tax withholding with the increased standard deduction limit, expiration of the itemized deduction, and other changes.
AG TAX LLP CAN HELP
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax return
- Cross Border Taxation and Business Planning
- US Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a tax consultation to discuss your queries, please contact us at:
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Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
