It hurts the ol’ wallet to pay taxes, but tax penalties hurt even more. The penalty for underpayment of an estimated tax can be especially painful since it’s often quite easy to avoid.
To keep from being slapped with an underpayment penalty, you generally must prepay at least 90% of you’re current-year liability. Many taxpayers can also avoid this penalty by paying at least 100% of their prior-year tax liability during the current year. Under either method, required payments and tax liabilities are measured quarterly.
Most employees prepay their taxes through their payroll withholding. But if you have substantial income that isn’t subject to withholding (such as dividends, interest, and capital gains), or you have more than one job, your withholding many not be enough.
If it looks like you’re headed for an underpayment penalty, consider asking your employer to withhold more from your remaining current year paychecks. Besides eliminating a future underpayment, additional withholding can eliminate an underpayment that occurred earlier in the year. That’s because the IRS treats withholding as being paid equally throughout the year, even if you make larger payments at year-end.
If you have too much income not subject to withholding, you are required to pay quarterly estimated tax payments by using for 1040 ES. The due dates are as follows:
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• April 15th – first quarter estimate due
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• June 15th – second quarter estimate due
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• September 15th – third quarter due
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• January 15th – fourth quarter due
If you paid less than the required for a previous quarter, and your income isn’t subject to withholding, consider making a catch-up estimate payment. Unlike withholding, an estimated payment can’t eliminate an underpayment that’s already occurred, but it can keep the penalty from getting any larger. You can make a catch-up payment immediately, or include it with your quarterly 1040 ES estimate. Generally, state laws follow the Federal format. Please check with your tax professional in your area for additional assistance.