Estimated Payments

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Disclaimer:

The view expressed in this article is the opinion of the writer and is not tax advice. Tax law is always subject to change. This article is for information purposes only. Always consult a qualified tax professional for advice on tax planning and strategies.

If you owe more than $1,000 in tax liability, you might have heard the phrase "estimated payments." Since the US has a pay-as-you-go tax system, it is only right to include an estimated payment.

If you have a business, you are most likely already making estimated payments every year.

If you are a W-2 employee, then the estimated payments are basically the withholding from your paycheck, which your employer pays on your behalf in quarterly installments to both the federal and state governments.

To avoid estimated payments for federal, the goal is to keep your yearly liability under $1,000. In Maryland, you want to keep your liability under $500 to avoid penalties.

Generally, estimated payments are considered mandatory when these rules are triggered. Other rules apply to what percentage the estimate needs to be when calculated if you must make estimated payments with a W-2; odds are you have your W-4 filled out incorrectly or set to have tax taken out too low.

If you own a business, with or without employees, you are almost guaranteed to have estimated payments. It is always good policy to talk to your tax preparer about strategies to minimize or eliminate the need for estimated payments; however, sometimes it is necessary.

Estimated payments are not a bad thing; they can allow you to keep the liability down, so you are not saddled with an enormous tax bill at the end of the year and stay compliant with the tax code. There is a “failure to pay the estimated payments” penalty. If you were told to make estimated payments and didn’t, you could face those penalties.

Remember, estimated payments aren’t a bad thing.

IRS Circular 230 Disclosure: To comply with requirements imposed by the IRS, that unless specifically stated otherwise is not intended or written to be used, and cannot be used, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter herein. Article for educational purposes only.

Always consult a qualified tax professional about all tax matters.