With April 15th fast approaching, I want to shed a little light on the subject of estimated tax payments. I am a bit shocked this year by the number of taxpayers I speak with each year who do not fully understand their responsibility to make sufficient tax payments.The first concept that's important to understand is that the US tax system is a quarterly system, not an annual one. Tax payments are due at least quarterly, and the year-end return is simply a reconciliation of the activity. If you receive income in the first quarter of the year, the taxes are due at the end of that quarter, not in April of the following year when you file your tax return. Now, I wouldn't have job security if it were that simple! For starters, the IRS structures the four quarters of the year to end in March, May, September and December, not the more common, normalized March, June, September, December quarter ends. What types of income trigger you to be responsible for estimated tax payments? Most employees have taxes withheld from their paychecks on a bi-weekly basis so they exceed the quarterly requirement. However, if you have other sources of income such as interest, dividends, Partnership or S Corp draws or dividends, sole proprietorship or LLC income, or a profitable rental property, then estimated taxes may very well be required The IRS requires that you must pay estimated taxes in 2011 if you will owe $1,000 or more by year end, and if your total taxes withheld from other sources are less than the smaller of 90 percent of your 2011 return, or 100 percent of your 2010 liability (or 110 percent if your adjusted gross income is greater than $150,000). Confused? You're not alone!While you must follow the law as I described it above to avoid interest and penalties, I find it's much simpler to think about it this way: If you owed at least $1,000 at the end of 2010 or if you make $5,000 or more of untaxed income, then you should make estimated tax payments during 2011. If you choose to wait until 2012, or even 2nd or 3rd quarter, to see if you owe additional taxes, you may be subject to some fairly steep interest and penalties. Once you figure out that you need to make estimated payments, how do you go about it? You need to get estimated tax payment coupons (for Colorado residents, these would be form 1040-ES from the IRS and 104-EP from Colorado). These coupons only ask for your name, address, SSN and the amount you are paying in, so even if your tax preparer or software doesn't provide them automatically, they are easy to obtain and file. On the 15th following each quarter end, you should write a check for your amount due and include the form name, your SSN, and the quarter in the memo of your check (i.e. Form 1040-ES 123-45-6789, 1st Quarter) and mail to the tax agency along with the coupon. As I've said before, I highly recommend that you revisit your tax situation each quarter to be sure that you are paying in enough taxes along the way to prevent interest, penalties ... and surprises! Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit www.cpamichele.com.
Your Taxes: Are you responsible for estimated tax payments?
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