by Richard S Schwartz CPA CVA
If your tax situation may be changing this year as a result of receiving additional investment or consulting income that you were not expecting when you had met with your tax preparer last spring, you most likely will need to pay to the government additional taxes related to this income. Often, this type of income has no taxes being withheld from it. Therefore, we recommend that taxpayers be proactive and aware of the different methods of prepaying taxes to avoid IRS penalties for paying too little in taxes during the year.
Below are the primary methods of prepaying taxes to the IRS during the year to prevent the assessment of IRS penalties when you file your taxes.
- Mail payment with estimated tax payment vouchers.?The IRS allows taxpayers to mail in a check with quarterly estimated tax payment vouchers. The tax payment coupon to be used is?Form 1040-ES, Estimated Tax for Individuals.?Payment should be made payable to United States Treasury. The quarterly payment due dates are April 15, June 15, September 15 and January 15.
- Make online tax payments via the IRS website.? Taxpayers can pay quarterly estimated tax payments directly through the?IRS website?(same quarterly due dates as noted above). Access the IRS website at IRS.gov and then go to the link ?Make a payment?. Taxpayers can specify the payment amount and the bank account to have the funds withdrawn from via a direct debit from their bank account. There is no fee for this payment method. Or taxpayers can similarly make a tax payment using their credit card. There is a 2% transaction fee for this type of payment. To pay estimated tax payments using either of these two options via the IRS website, go to the link:?https://www.irs.gov/payments.
- Increase withholdings from your paycheck. Perhaps the easiest way to pay extra taxes into the IRS is through your paycheck. You can instruct your employer to have additional taxes withheld for your pay for each pay period. Typically, this type of payroll tax withholding request would be communicated through the employer?s human resources department using the?W4 form. Alternatively, many companies allow you to make changes to your tax withholdings online via an employer website.
Generally, as long as you have 100% of your prior year tax liability (110% if your prior year adjusted gross income exceeded $150,000), or 90% of your current year tax liability paid to the IRS via a combination of estimated tax payments made evenly over the year and federal taxes withheld from your pay, then the taxpayer will not be subject to an underpayment of tax penalty. However, as there is a bit more complexity involved in paying estimated taxes to avoid an underpayment of tax penalty, we recommend having a discussion with your tax preparer prior to paying estimated taxes or adjusting your tax withholdings from your paycheck on your own.