Estimated Tax Penalty Frequently Asked Questions

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David M. Kaufmann, CPA

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Note: This is a complicated subject. We will only touch on some topics. We recommend that you talk these issues over with an attorney and a CPA.

What is estimated tax?
What is the estimated tax penalty?
Who needs to pay estimated tax?
Do I really need to make estimated tax payments?
How much estimated tax should I pay?
Can the estimated tax penalty be reduced?
 

What is estimated tax?

Estimated tax payments are to pay tax for the current year.  In many ways, estimated taxes are very similar to payroll withholding.  For example, 2010 estimated taxes will generally be paid in 2010.  Estimated taxes either reduce the balance due on the tax return or increase the overpayment (possible refund) of taxes.

Estimated taxes can either be paid via check or electronically.  If you use a check, you will include Form 1040-ES with the check.  You can pay electronically from the EFTPS Website.  If you plan to pay via the EFTPS system, sign up 3 - 4 weeks before you need to make the payment.

Estimated tax payments are generally due April 15, June 15, September 15 and January 15.

What is the estimated tax penalty?

The estimated tax penalty is for not paying enough in for combined payroll withholding and estimated taxes.  The penalty for individuals is sometimes figured on Form 2210.  Sometimes Form 2210 is not needed, and the IRS will automatically bill you.  Letting the IRS bill you sometimes results in paying too large of a penalty.

This penalty is computed similar to simple interest.  The penalty rate can change each quarter.

Corporate estimated tax penalties are computed on Form 2220.

Note: If there is an estimated tax penalty, the IRS is not allowed to compute interest on this penalty amount.


Who needs to pay estimated tax?

Generally, if the tax due, after a reduction for withholding, is $1,000 [for 2010] or more estimated tax are due.


Do I really need to make estimated tax payments?

It depends!  Since withholding can count as estimated taxes, increasing payroll withholding can reduce or eliminate the need for estimated tax payments.

Withholding may be even better than estimated taxes!  Estimated taxes are considered paid when the IRS receives the payment.  Thus, a payment that is received on December 31, is considered paid on December 31.  Payroll withholding for a December 31 paycheck is considered paid 25% on April 15, 25% on June 15, 25% on September 15 and 25% on January 15.

How much estimated tax should I pay?

[This is an oversimplification using amounts for 2010]

None, if your payroll withholding is not less than $1,000 of your tax due.

In general, estimated taxes should exceed the lower of 90% of your current year tax or 100% of the prior year's tax.  However, if your Adjusted Gross Income is over $150,000 ($75,000 if filing Married - Separate), estimated taxes should exceed the lower of 90% of your current year tax or 110% of the prior year's tax.

You can also annualize your estimated taxes if your income is seasonal.  A retired person who works as a department store Santa might find annualization useful.  A better solution would be to have income withheld, if possible.  The annualization computation is somewhat complex.

Can the estimated tax penalty be reduced?

Sometimes a person can request a waiver of this penalty.  If the IRS accepts the waiver, the penalty can be reduced or eliminated.  If you need assistance with this, [after all, this is what we do] contact us at 720-493-4804.


If you have questions about this, do not hesitate to contact us at 720-493-4804.

Circular 230 Notice:

The information contained here are simplifications of complex subjects. We recommend that you talk to a CPA about this issue.

To ensure compliance with requirements imposed by the IRS, we inform you that (i) any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.