#estimatedtaxes

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Estimated tax payments to IRS

Understanding Estimated Tax Payments to the IRS

Paying taxes is a responsibility that should align with the income you earn throughout the year. Taxes can be paid either through withholding (deducted directly from your salary or pension) or through estimated tax payments to the IRS. Here’s a breakdown of what estimated tax payments entail and when they are necessary:

What Are Estimated Tax Payments?

Estimated tax payments are required when the tax withheld from your salary or pension is not enough to cover your tax liability, or if you receive additional income that isn't subject to withholding. This includes income from:

Interest and dividends

Self-employment activities

Rental properties

Gains from investments

If you're self-employed or run your own business, you are responsible for making these payments not just for income tax but also for self-employment tax and, in some cases, alternative minimum tax.

Why Are Estimated Tax Payments Important?

Failing to pay sufficient taxes throughout the year can result in penalties. The IRS may impose penalties if:

You don’t pay enough tax through withholding or estimated payments.

Your estimated payments don’t align with how your income is earned. Even if you're due a refund, inconsistent payments can trigger penalties.

Who Needs to Make Estimated Tax Payments?

Individuals, including sole proprietors, partners, and S corporation shareholders, must make estimated tax payments if they expect to owe at least $1,000 in taxes after accounting for withholdings and credits.

To avoid penalties, many taxpayers calculate their estimated payments based on the prior year’s tax liability. This approach can ensure compliance and reduce the risk of underpayment.

How to Make Estimated Tax Payments

The IRS offers several convenient options for making estimated tax payments. One of the most reliable methods is the Electronic Federal Tax Payment System (EFTPS). Through EFTPS, both individuals and businesses can manage payments for:

Federal tax deposits

Installment agreements

Estimated taxes

Estimated tax payments are typically divided into four quarterly installments. Ensuring that you pay adequate amounts each quarter helps avoid penalties and simplifies compliance.

Tips for Managing Estimated Taxes

Consistency is key. Regularly set aside funds for taxes and make payments weekly, monthly, or bi-weekly, ensuring you meet your quarterly obligations.

Use prior-year data. Estimate your payments based on your previous year’s tax liability to simplify calculations.

Stay informed. Regularly review your income and withholding to determine if adjustments are necessary.

Understanding and planning for estimated tax payments can prevent financial surprises and penalties. Whether you're self-employed or have additional income sources, staying on top of your tax responsibilities throughout the year is essential for smooth compliance.

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Here are some ways to stay ahead of your tax bill come filing time: 1. Most income is taxable including unemployment income, refund interest, income from the gig economy, and virtual currencies. Keep a running tab of all income this year, and keep a separate category for income you haven't yet paid taxes on. 2. Use the IRS withholding calculator to figure the right amount of tax to have withheld from any wages that are not paid by an employer (contract work, etc.) 3. Make quarterly payments of your estimated tax if you get a lot of your income from non-wage sources like self-employment, investments, taxable Social Security benefits, and some pension and annuity income. 4. Don’t bank on getting your federal refund by a certain date. The IRS has had a lot of delays recently processing returns and getting taxpayers their money. BONUS TIP: Use a smart professional who can help get you set up and put systems in place for checking these off. We're a DM away. AND... if you still need to do these things and have unpaid taxes you need to tackle, let's talk about that too.

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Estimated taxes are advance payments made to the IRS throughout the year on income not subject to regular withholding.

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