Each year, 10 million taxpayers are facing estimated tax penalties.
IRS offers some simple tips to help prevent a surprise at tax time.
People pay taxes on income through withholding on their paycheck or through estimated tax payments. Taxpayers who pay enough tax throughout the year can avoid a large tax bill and penalties when they file their return.
Taxpayers should make estimated tax payments if:
- The tax withheld from their income does not cover their tax for the year.
- They have income without withholdings. Some examples are interest, dividends, alimony, self-employment income, capital gains, prizes or awards.
Here are five actions you can take to avoid a large bill and estimated tax penalties when you file their return.
- Use Form 1040-ES. Individuals, sole proprietors, partners and S corporation shareholders can use this form to figure estimated tax. This form helps someone calculate their expected income, taxes, deductions and credits for the year. They can then figure their estimated tax payments.
- Use the Withholding Calculator on IRS.gov. This tool helps users figure how much money their employer should withhold from their pay so they don’t have too much or too little tax withheld. The results from the calculator can also help them fill out their Form W-4. Taxpayers whose income isn’t paid evenly throughout the year, can check Publication 505 instead of the calculator.
- Have more tax withheld. Taxpayers with a regular paycheck can have more tax withheld from it. To do this, they must fill out a new Form W-4and give it to their employer. This is a good option for taxpayers who participate in a sharing economy activity as a side job or part-time business.
- Use estimated payments to pay other taxes. Self-employed individuals can make estimated tax payments to pay both income tax and self-employment tax. Self-employment tax includes Social Security and Medicare.
- Use Form W-4P. Generally, pension and annuity plans withhold tax from retirees’ payments. Recipients of these payments can adjust their withholding using Form W-4P and give it to their payer.
Give us a call if you would like more information.
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This content supports Bolko & Associates’ marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Bolko & Associates to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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