I didn’t pay estimated taxes to the state or IRS… Now what?
Quick, when’s tax day? April 15th, right? Maybe March 15th if you have a partnership or S corp? While we all love to dread tax day, it’s not the only day taxes are due. If you don’t spend a lot of time thinking about taxes (and who does?), you may be surprised to learn that taxes are collected throughout the year, not just in spring.
What are estimated taxes?
As you earn income, taxes are due regularly over the course of the year. Tax payments on this income are made in one of two ways: withholding or estimated taxes.
If you have a substantial source of income that isn’t subject to withholding—such as self-employment income or dividends—you pay estimated taxes instead. Estimated taxes are payments you make throughout the year based on what you expect to owe.
Why haven’t I heard about estimated taxes before?
If you’ve worked for other people most of your life, your employers were most likely required to withhold taxes from your paycheck. Most of the time, this withholding is sufficient, so estimated payments aren’t required.
But sometimes your income doesn’t come from a standard salary from a regular employer. Once you start to add in different kinds of income, such as self-employment income, dividends or interest, you may find that you owe more taxes more often.
Who has to pay estimated taxes?
Are you a business owner, partner or shareholder? Odds are you’ll have to pay estimated taxes (unless your tax liability is pretty low).
On the federal level, there are few different factors that determine whether or not you have to make estimated payments.
Typically, you won’t owe the IRS estimated taxes if one of the following is true:
- You expect to owe less than $1,000 ($500 for corporations). This is after subtracting income tax withholding and refundable credits.
- Your withholding and refundable credits are at least 90% of this year’s total estimated tax (or 100% of the previous year’s total tax). For instance, if you estimate this year’s tax to be $20K and your withholding is at least $18K (90%), you’re in the clear.
Many states model their requirements for estimated taxes on these IRS guidelines—although the minimum tax liability is often lower. For instance, instead of $1,000, you may owe estimated tax if your tax liability is more than $500 in Minnesota or more than a mere $200 in Iowa.
These factors are, of course, just general guidelines. Like most tax topics, there are plenty of variations and special rules that complicate who pays and how much. On the federal level, for example, certain income brackets and occupations (such as farmers and fishermen) are subject to different requirements, so it may be useful to consult a tax attorney or specialist.
When am I supposed to pay estimated taxes?
On the federal level, estimated taxes are paid quarterly. If you’re operating on a traditional calendar year, every 3 months is considered a payment period, and the due date is a couple weeks later. For instance, the first payment period of the year is January through March. Any estimated tax payments are typically due by the 15th of the following month (so, April 15th).
Don’t expect things to be exactly the same on the state level. While most estimated taxes are due quarterly, exact requirements and due dates vary. For instance, while April 15th is the federal due date for first-quarter taxes, it’s April 20th in Hawaii and April 30th in Iowa.
How do I know what my estimated tax is?
For federal taxes, you can calculate your estimated tax by filling out an IRS form. Individuals, sole proprietors, partners, and S corp shareholders fill out Form 1040-ES. Corporations fill out form 1120-W. For state taxes, you can usually contact your state’s department for revenue or taxation to find requirements and forms.
What happens if I don’t pay enough estimated tax?
You’ll have to pay the remaining tax owed (hopefully, this is pretty obvious—you don’t get released from your tax duties just because you didn’t expect you’d have to pay them). You may also have to pay a penalty.
The question everyone wants to know is how much you’ll pay in penalties. Unfortunately, that’s not an easy question to answer, as penalties aren’t typically flat fees. Penalties are usually calculated based on the amount of your underpayment and the number of days late it is. For federal taxes, you can look at Form 2210 (Form 2220 for corporations). Depending on your specific situation, you may have to calculate your penalty yourself using one of the methods specified on the form, or the IRS may calculate your penalty for you and send you a bill.
For a more straightforward state-level example, we can look at Iowa. For the 2018 tax year, the daily penalty rate for an estimated tax underpayment was 0.016438%. So, if you underpaid by $10,000, you would essentially owe $1.64 for each day late.
Is there anything I can do to avoid paying penalties?
While you can’t go back in time, you may be able to request a penalty waiver. The IRS waives penalties in a few situations. If there was some sort of “casualty, disaster, or other unusual circumstance” that would make it “inequitable to impose the penalty,” you can get a waiver. If there was a federally-declared disaster in your area (think wildfires or hurricanes), the IRS automatically applies the waiver, but if it was something more local, you’ll have to apply using Form 2210 or 2210-F. If you’re recently retired or disabled and had a reasonable cause for not making the payment, you may be able to request a federal penalty waiver as well. For state penalty waivers, the best option is to contact the tax or revenue department for assistance.
The long and short of it: If you miss an estimated payment, take steps to pay it off or request a waiver as soon as possible—penalties can increase daily.
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