For some people, tax day comes four times a year.
On April 16, many Americans let out a sigh of relief. Tax day is in the books, and they won’t have to give much thought to their taxes for another year. Or will they?
“As the tax system is set up, it’s a pay as you go system,” says Craig Ferrantino, president of Craig James Financial Services in Long Island, New York. That means people who don’t have taxes withheld from their income may be on the hook for sending in quarterly tax payments.
Quarterly Tax Payments: Not Just for the Self-Employed
Self-employed people, such as independent contractors, freelancers and small business owners, belong to the most obvious category of taxpayers who need to send in quarterly payments. These workers don’t have taxes automatically withheld by an employer so they need to send in their own payments four times a year on the 15th of January, April, June and September.
However, it isn’t only the self-employed who have to send in these payments. Anyone who could end up owing more than $1,000 in April should be making estimated tax payments throughout the year.
There are a number of scenarios in which taxpayers might need to make estimated payments, even if they have taxes withheld from their paycheck. Estimated payments may need to be sent to cover income from the following sources:
- Gambling winnings or other prizes
- Dividends and interest
- Divorce settlements and alimony
- IRA distributions
- Social Security (if your income is high enough to make benefits taxable)
“It’s very important you’re on top of this,” says Deborah Graver, senior advisor and partner at Signature Financial Planning in Pittsburgh. She adds that even if you normally get a tax refund, you could be required to send estimated payments if you have a large inflow of cash for a particular year.
How Much Do You Need to Pay?
When you file your 2015 taxes next April, the IRS will look to see if you’ve done one of the following:
- Paid 100 percent of the amount you owed on your 2014 federal tax form.
- Paid 90 percent of the taxes owed on your 2015 federal tax form.
The first option is applied only if your 2014 tax form covered all 12 months of the year. Otherwise, the IRS will look for you to pay 90 percent of what you owe for the current year. There are also special rules for high earners. Couples earning more than $150,000 are expected to send in payments equal to 110 percent of their 2014 federal taxes.
The tax code can be anything but simple which is why financial planners like Graver encourage everyone to consult with a tax professional for guidance on their particular situation. Tax software can also help you determine your quarterly payments.
Don’t Delay, Send in Missing Payments Today
Chris McMahon, president and CEO of Pittsburgh-based McMahon Financial Advisors, says one of the most common misconceptions about quarterly payments is they can be made up with a lump sum payment at the end of the year. “This is incorrect,” he says, “penalties and interest accumulate per quarterly payment date.”
In other words, don’t wait to send in a late payment. Don’t think you can avoid the penalties by overpaying for the rest of the year either. The IRS website states, “If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.”
The only people who may avoid a penalty are those who fail to make a payment because of a casualty, disaster, or “other unusual circumstance,” according to the IRS. Those who retire (and are at least age 62) or become disabled during the year they owe estimated taxes are also exempt from penalties if “the underpayment was due to reasonable cause and not willful neglect,” the IRS says.
For everyone else who thinks they may owe taxes next year, the best advice is to consult with a tax professional to determine the exact amount owed. Once you know the amount, there’s no need to wait until the next quarterly tax due date in January.
“The IRS will take your money any time,” Ferrantino says.