Estimated taxes are payments made to the government throughout the year to cover your expected tax liability for the current tax year. These payments are typically required for individuals and business owners who do not have taxes withheld from their income, such as self-employed individuals or those who receive income from investments.
The estimated taxes are usually paid on a quarterly basis, and the due dates for each quarter are April 15, June 15, September 15, and January 15 of the following year. The estimated taxes are calculated based on your projected income and deductions for the year. If your estimated tax payments are not sufficient, you may be subject to penalties and interest charges.
The IRS has a "safe harbor" rule that allows individuals to avoid underpayment penalties if they pay either 100% of their prior year's taxes or 110% of their current year's projected taxes through estimated tax payments.
The 100% rule applies to individuals whose prior year's adjusted gross income (AGI) is less than $150,000 ($75,000 for married taxpayers filing separately). Under this rule, you must pay in at least 100% of the taxes you owed for the previous year to avoid underpayment penalties for the current year.
The 110% rule applies to individuals whose prior year's AGI is more than $150,000 ($75,000 for married taxpayers filing separately). Under this rule, you must pay in at least 110% of the taxes you expect to owe for the current year to avoid underpayment penalties.
It's important to note that these rules are for avoiding underpayment penalties only and do not guarantee that you will not owe additional taxes when you file your return. It is a good practice to regularly check your financial status and make adjustments to your estimated tax payments if necessary to avoid any surprises come tax time.
If you aren't sure whether or not you should be paying in estimated taxes, reach out to us and we can help you figure that out. If you are thinking you should be paying estimated taxes, we can help you figure out how much you should be paying in each quarter. Call your Herriman CPA today!
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