My wife and I prepared and filed our taxes electronically using TurboTax. When we printed the final paperwork, it included a bit we’ve never seen before about Estaimated Tax Payments. Specifically, it says:
ESTIMATED TAX PAYMENTS:
Your return indicates the following estimated taxes are to be paid for 2004 using form 1040-ES.
MAIL: VOUCHER 1 DUE DATE: April 15, 2004, AMOUNT: $XXXX
MAIL: VOUCHER 2 DUE DATE: June 15, 2004, AMOUNT: $XXXX
MAIL: VOUCHER 3 DUE DATE: September 15, 2004, AMOUNT: $XXXX
MAIL: VOUCHER 4 DUE DATE: January 18, 2005, AMOUNT: $XXXX
…It also printed us four copies of form 1040-ES, with mailing instructions.
If I’m understanding this correctly, the IRS has decided that we have to pay some of next year’s taxes in advance, starting right now. Er… really? Can they do that? Or am I misunderstanding something, and this is just a prepayment option they’re giving us?
The short answer is that there’s nothing voluntary about it. If you don’t have enough withheld, and/or don’t pay enough in estimated tax payments during the year, you’ll be hit with a penalty. If you end up owing more than $1000 in taxes, and the amount you end up owing is more than 10% of your total tax liability, you have to pay a penalty. See the instructions for line73 of the Form 1040.
On the other hand, if you have any significant income apart from your salary, like interest, dividends, capital gains, etc., but fail to take that into account when telling your employer how much to withhold from your salary, you can still end up not having enough withheld, and be subject to a penalty.
The basic point remains: it is not an option simply to pay all of your Federal income tax all at once on April 15. The law requires you to have enough withheld from your salary, or to make sufficient estimated tax payments during the year, to cover your tax liability.
I ran into the same thing last month when I did my taxes using TurboTax.
The IRS has not decided anything; TurboTax did, based on what you input in the “Future Taxes” section.
In this section of the program (where it asks you how much you have been paid to date and how much has been withheld so far), the program has figured that you are not having enough withheld. This may or may not be true, depending on the accuracy of your estimated income and deductions.
You can avoid the estimated tax payments by simply increasing your withholding.
(Since you state that you’ve never seen this before, I’m assuming that you are not self-employed, and that your employer does your withholding.)
Oh, and as others have stated, you are required to pay most of next year’s taxes in advance. What may be confusing you is that it’s actually not “next year’s taxes.” It’s this year’s 2004 taxes, which are actually due throughout calendar year 2004. This is accomplished for most people by the method of paycheck withholding throughout the year.
The IRS didn’t “decide” to collect next year’s taxes in advance. The income tax law requires that taxes be paid on income as it is earned. If you look at your pay stubs for 2003 there will be a section for federal and state income taxes withheld. If you are self-emplyed or a farmer you should have been paying estimated taxes all during 2003.
As Early Out wrote, there is a penalty for not doing so if you had any taxable income after deductions. And I assume you did.
During the calendar year of of 2003, my wife and I (neither self-employed) had money withheld for taxes each month by our employers. But when the year ended, and it came time to tally everything up, it turned out we still owed some tax. (Probably because my wife earned an extra chunk from a stock-purchase plan, from which nothing was withheld.) We’ve payed that amount (thus making up the difference), so we should be all square with the IRS for 2003
The IRS (or TurboTax, or someone) has determined that, in order for us not to have the same thing happen next year, we should be making up the likely difference for the 2004 calendar year as we go. They’ve figured out how much extra we’d need to pay each quarter so that when April 2005 rolls around, we’ll have payed closer to the correct amount during the 2004 calendar year.
A bonus question for you knowledgeable folks: the forms aren’t calling this a “penalty,” but several of you who have answered my OP are calling it that. Are we paying more taxes because this happened, and not simply making up the difference? If so, just how much is this penalty? (Or are these “estimated tax payments” themselves the penalty? If so, that’s one harsh punishment! :eek: )
The tax instruction booklet tells you when penalties will be assessed. I believe that there is no penalty for underpayment if you pay at least 90% of the tax due by withholding or estimated payments during the year.
My mom’s a tax accountant so I called her. Per DeVena’s Mom…
“You have a choice to make. You can either pay estimated tax as you go along through your year… Or make one payment with your return. If you wait and pay all at one time, you will be penalized and be charged an additional fee.”
I can pose additional questions to her, but with 2 days left in the tax year, she tends to answer the phone speaking numbers.
I dont know if you had to pay a penalty for 2003 or not, depends on how much extra tax you actually owed - again, that 90% rule, also the Feds have a rule that even if you didn’t pay the 90%, if you had enough withheld to cover the previous year’s tax bill, you’re still OK.
So, let’s say you had enough income in 2002 that you owed a total of 10,000 in federal taxes. You had enough withheld, or paid it on April 15th, or whatever.
You got a beeeeeeeg raise in 2003, doubled your salary, sold stock, or whatever, and your total tax bill was 20,000. So you had to withhold (or pay via quarterly estimated) either 10,000, or 18,000, whichever is less.
On the 2004 quarterly estimated: That is not a penalty. It’s just (as others pointed out) TurboTax assuming you are going to have similar income in 2004, and that you may not be having enough withheld. You need to look at your own withholding, and expected earnings, and see if you’ll really be that under-withheld. If you don’t think you will, then you don’t need to file quarterly estimated. If you think your withholding is too low, then you can either file/pay that quarterly estimated tax (avoiding the big 4/15/2005 check) or you can bump up your withholding to cover it. We do that, to cover extra taxes we owe each year (we have a nanny, and that’s how we handle her FICA etc.).
If you also use Quicken, it has a tax planner feature that can estimate your tax bill based on what your paychecks, interest income, etc. have been so far this year. You can update those figures if you know you’ll be taking a pay hit, or getting additional income, or whatever. I doubt it’s perfect but it should help you get a good feel for what you might owe.
There are 3 safe harbor rules generally cited which preclude a taxpayer from underwithholding penalties.
The diminimus rule. If withholdings are short by $1,000 or less, there is no penalty for under withholding.
The 90% rule. If withholding is equal to 90% or greater of current tax liability, there is no underwithholding penalty
The 100% rule. If withholding is equal to 100% of prior year tax liability, there is no underwithholding penalty (the 100% rule is adjusted to 110% for high income individuals [>150k AGI or 75k AGI married filing separately])
Keep in mind, that though there may be no underwithholding penalty, all tax liability is still due.
There are also various stipulations about seasonal wage earners that can exempt you from estimated payment requirements. If you are not self employed, are not a high wage earner, and do not derive significant non W-2 income, you should be able to structure your withholding to roughly equal your projected tax liability.
Estimated tax payments are not a “penalty”. They are a requirement if you meet certain criteria. They are required advance payments due to your situation. At the end of the year, a true up is performed via your tax return and any amount over or under paid will be reconciled.
Turbo tax will advocate using the “safe harbor” conditions assuming that events in the current year will be replicated in the next year. If you know that not to be the case, estimated payments in your situation of taking a “extra chunk” from the stock purchase plan, are not necessary. However, if you do not make the estimated payments, you will lose one possible safe harbor criteria when determining your withholding amount.
Wow! How relavent! Permission to ask a follow-up question?
My fomer boss neglected to take out STATE taxes from my paycheck all of last year, so I got similar “payment coupons” from TurboTax Online as well. This was all a big clerical screw-up and he’s apologized and offered to pay any late fees, penalties or interest. The thing is, I’ve been unemployed most of this year. So I’m assuming that my tax liability will be way less this year. What do I do now? Note that this is for NC only, fed taxes are fine (aside from having to pay and additional $232 :mad:
(Note: my former boss used some ghetto, “homemade” paychecks from Quickbooks that didn’t show any SSA decuctions either (although I verified that he did indeed pay them on my W2). That’s why I didn’t notice the lack of state witholding.)
Two years ago I sold stock to the tune of 45 grand and I was penalized for not making estimated tax payments. I thought this was out of line, because I had no idea that I would make the sale and therefore could not have estimated in advance - but that is a different story. The point is, they seem mandatory to me.
Of course as soon as you made the sale you knew it and I believe the law says you should pay the estimated tax on it within a ciertain time after the sale.
Who levied the penalties, and how were you informed of them?
Did you meet any of the 3 safe harbor provisions I listed above? It is unlikely that a one time stock sale would trigger penalties for under withholding if the safe harbor requirements were met.
I am making the assumption that the laws of NC follow the fed laws with regard to safe harbor provisions. You can choose to not make estimated payments, and if you meet the safe harbor provisions listed above, you will not have a penalty imposed. However, if at the end of the year your tax liability is significantly greater than your tax withholdings, the 100% rule will not apply, and penalties may be imposed.
Most individuals without significant pay raises, and without significant non W-2 income, meet both the 90% and 100% (110%) rule. Underwithholding penalties are generally imposed against those who are self employed, or have significant non W-2 income.
There are two ways to figure out whether you underpaid your taxes throughout the year. The first is to average your income over the whole year and average your withholding (but not your estimated payments), also over the whole year. With this method, your 45K turns out to be 11.25K per quarter, and you are underwithheld for all but one quarter (you are okay in the one you paid the estimated taxes).
In the second method you break out your income, withholding, and estimated payments by quarter. Using this method you would probably have been okay. Unfortunately, this is a royal pain so most people don’t do it even if they know about it. I paid an $84 underpayment penalty for 2003 rather than bother to tally up all of those numbers by quarter (which would have meant taking each of 24 paystubs and figuring out how much taxable income and withholding I had per quarter). $84 seemed cheap by comparison.
I none of this makes sense, check out Form 2210. It is a bitch.
Wow, this whole thread is making me glad that I’m taking a federal taxation class next year. I hope that we cover this sort of thing.
My question is, how much do you have to worry about this constant payment thing? After all, taxes get pulled from my paycheck every time, so does that mean I’m generally square with the IRS, especially if I’m pulling out a little bit extra on withholding every pay period?