11 Tips to Consider Regarding Your Estimated Taxes
by Martin Abo, CPA, ABV, CVA, CFF, Abo and Company, LLC/Abo Cipolla Financial Forensics, LLC –
April 9, 2019
So, you just finished the corporate tax deadline of March 15. What’s worse than finding out how much you owe on your 2018 income tax return due April 15? How about learning that you may have to ALSO pay 2019 income taxes starting the same time?
Alas, you may need to pay estimated taxes to the IRS and one or more states during the year if you have income that is not subject to withholding. This can depend on what you do for a living, what your spouse may be earning when you file jointly and the types of income you receive.
Here are 11 points to consider regarding your estimated taxes if you need to pay them and how to pay them.
- If you have income from sources such as self-employment, interest, dividends, alimony, rent, gains from the sales of assets, prizes or awards, then you may have to pay estimated tax. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension or other income is not enough.
- As a general rule, you must pay federal estimated taxes in 2019 if both of these statements apply: 1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and tax credits, and 2) You expect your withholding and credits to be less than the smaller of 90 percent of your 2019 taxes or 100 percent of the tax on your 2018 return. However, the IRS did announce on January 16, 2019, that it would waive the underpayment penalty for those taxpayers whose 2018 federal income tax withholding, quarterly estimated tax payments or a combination of the two, were at least 85% of their 2018 tax liability. The IRS issued an updated withholding calculator and a new Form W-4 in early 2018 to account for changes enacted by the Tax Cuts and Jobs Act (TCJA). Even with the updated calculator and form, some taxpayers were unable to accurately calculate the amount of their required estimated tax payments for the 2018 tax year.
- For sole proprietors, partners and S corporation shareholders, you generally should make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
If you also receive salaries and wages, you may be able to avoid having to make estimated tax payments on your other income by asking your employer to take more tax out of your earnings. To do this, file a new Form W-4, Employee's Withholding Allowance Certificate, with your employer. Generally, if you receive a pension, annuity or certain other deferred compensation payments you can use Form W-4P, Withholding Certificate for Pension or Annuity Payments, to start or change your withholding from these payments.
To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year. You can use the worksheet in Form 1040-ES, Estimated Tax for Individuals, for this. You want to be as accurate as possible to avoid penalties.
The year is divided into four payment periods, or due dates, for estimated tax purposes. Those dates for this year are April 15, 2019, June 17, 2019, Sept. 16, 2019, and Jan. 15, 2020. As you can see, estimated tax payments are made in four quarterly installments and can be based on a regular tax method or an annualized income installment method.
You can make more than four estimated tax payments. To do so, make a copy of one of your unused estimated tax payment vouchers, fill it in, and mail it with your payment. If you make more than four payments, to avoid a penalty, make sure the total of the amounts you pay during a payment period is at least as much as the amount required to be paid by the due date for that period.
The disadvantage to utilizing the annualized method as opposed to the regular method is that the calculation of your estimated tax payments may be more complex and time consuming. Additionally, your estimated tax payments must be recalculated at the end of every quarter. If you make an estimated tax payment using the annualized income method for a quarter, you may change to the regular method for a subsequent quarter but you must recapture the difference between the annualized income installments and the regular installments by adding the amount of the differential for all previous periods to the regular installment for the next payment period.
An underpayment penalty is imposed on each underpayment for the number of days it remains unpaid. A penalty may be applied if you did not pay enough estimated tax for the year or you did not make the payments on time or in the required amount. A penalty may even apply if you have an overpayment on your tax return. The IRS recently announced that interest/penalty rates remain at 6 percent per annum for calendar quarters beginning April 1, 2019. Not necessarily the worst.
With the April 15, 2019, filing deadline around the corner, if you only have so much in funds available to pay the balance of your 2018 tax liabilities as well as 2019 estimated tax payments, our vote is generally to pay the 2018 amounts due IRS and/or the states. The 2019 underestimated tax penalty at 6 percent per annum at least does not have the additional "late payment of tax" penalty applied to it as you would with 2018 tax paid after April 15, 2019.
- Estimated taxes should be calculated for all states for which you will be filing individual resident or nonresident tax returns. For purposes of calculating estimates for most states, either the regular installment or annualized income installment method may be used.
Many clients typically call asking why we include 2019 estimated tax vouchers with their 2018 tax returns. When there is a material balance due on their federal or state 2018 return, we may often produce such safe-harbor estimates if we are unsure if the client will be having similar balances due this time next year. After discussing with us, clients often consider increasing their withholdings from various “buckets” of income they might receive (e.g., salaries, IRA or 401(k) distributions, social security benefits, brokerage/bank accounts, etc.) to so avoid the need for paying such estimates. Again, your personal call.
Martin H. Abo
Martin H. Abo, CPA, ABV, CVA, CFF is managing member of Abo and Company, LLC. He is co-managing member of Abo Cipolla Financial Forensics, LLC, an affiliate of the core accounting firm exclusively providing expert witness testimony on financial matters and other litigation support services as well as business valuations.