FOR IMMEDIATE RELEASE:

DO YOU NEED TO PAY ESTIMATED TAXES?

You may need to pay estimated taxes if you are self-employed, have income other than your salary or you receive income that is not subject to withholding, such as:

Self-employed income

Rent

Interest

Dividends

Alimony

Gains from sales of assets

Prizes and awards

You also may have to pay estimated tax if not enough income tax is being withheld from your salary, pension or other income. This applies to both your federal and state income taxes.

Farmers and commercial fishermen have special criteria to meet and may pay less in estimated taxes. You are considered a qualified farmer or fisherman if you earn more than two thirds of your gross income from farming or commercial fishing.

Corporations may also have to pay estimated tax. Corporate estimated tax is not addressed in this article.

WHO MUST PAY ESTIMATED TAXES?

That depends on one's situation. In most cases, you must pay estimated tax for the current year if both of the following apply:

You expect to owe at least $1,000 in tax for the current year after subtracting your withholding and credits, and

You expect your withholding and credits to be less than the smaller of:

90% of the tax to be shown on your previous year's tax return, or

100% of the tax shown on your previous year's tax return. Your previous year's tax return must cover all 12 months.

ESTIMATED TAX MAY NOT BE REQUIRED

You are not required to pay estimated tax for the current year if all three of the following conditions apply:

You have no tax liability for the previous year.

You were a U.S. citizen or resident for the whole year.

Your previous year tax year covered a 12-month period.

HOW TO DETERMINE YOUR ESTIMATED TAX

You will need to prepare estimates of what you expect to report on your current year tax returns for both federal and state income tax. To determine what your estimated tax payments should be, obtain copies of the following:

Your previous year's tax return. Use your previous year's tax return as a check to ensure you included all the income and deductions you expect to take this year. You should also look at the total tax you paid if you are going to base your estimated tax payments on 100 or 110 percent of your previous year's taxes.

Records of estimated tax payments you have already made for the current year. You need to take those payments into account in determining how much tax you still owe.

Estimated tax payments are generally paid in four equal installments. However, you may have unequal payments in some circumstances:

If your previous year's overpayment was credited to your current year's estimated tax payments.

If you didn't compute your estimated payments until after April, when the first one was due.

If you unexpectedly received a higher than normal amount of money during one quarter.

Estimated payments are generally due on April 15 of the tax year for the first payment due, June 15 for the second payment, September 15 for the third payment and January 15 of the year you file the tax return for the fourth payment. For example, if your estimated taxes are for 2011. Your payments would be due on April 15, 2011, June 15, 2011, September 15, 2011 and January 15, 2012. You could be charged a penalty if you fail to pay or do not pay enough tax each payment period, even if you are due a refund.

You can pay estimated tax by check or money order using the IRS Form 1040-ES for federal income taxes. Each state also has forms to pay their estimated tax payments. You can also pay electronically using a credit or debit card, Electronic Funds Withdrawal or you can pay through the Electronic Federal Tax Payment System (EFTPS). You may be charged an additional fee for using your credit or debit card.

TAX PLANNING FOR YOUR INDIVIDUALS

Go to YEAR END TAX PLANNING FOR INDIVIDUALS for what you can do to prepare your personal taxes for year end.

This article was intended to provide general information about estimating income tax. It does not contain all the rules and exceptions that may apply to your situation. If you would like assistance with preparing your estimated taxes, I can be reached at www.dgoodmancpa.com.

About the Author

Dianne Goodman, CPA, FCPA - Specializes in servicing Small Businesses and Individuals. Visit www.dgoodmancpa.com for relevant and current information on a variety of financial and tax issues focusing on small businesses and individuals or call at 1-888-851-1975.

CONTACT INFORMATION:

Dianne Goodman, CPA, FCPA
Comprehensive Small Business Solutions, PC
505 323-2307
1 888-851-1975 toll free
www.dgoodmancpa.com