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Making Estimated Tax Payments for Individuals and Businesses

Posted on 18, Nov, 2013

In this featured article we're going to take a look at the concept of estimated tax payments, paid via Form 1040ES, and why it's so important to pay them when they're due.

An estimated tax payment, as the name implies, is a payment you make to the IRS during the year based on an approximation of the amount of tax you owe. Like most American taxpayers you'll probably wind up overpaying, and then receive either tax credits or a tax refund at the end of the tax year.

Your estimated payments can be made 4 times each year - once in April, June, September and then on January 15th of the following year. This basically means you have a "pay as you go" way of paying your taxes, not having to wait until the end of the year to do so. Obviously it's in your own best interests to make your estimated tax payments on time, but there's also the fact that failure to pay your estimated taxes - accidentally or voluntarily - can and will result in you receiving a tax penalty of some kind.

The biggest hurdle for most people when dealing with estimated taxes is knowing what to pay - after all it's just an estimate. Fortunately the IRS, for once, provide estimated tax payers with a way of mitigating their risk of incurring penalties. Basically if you pay an amount equal to what you paid in tax the previous year then you won't incur any underpayment penalties. This is because you're obviously making that tax payment as a gesture of good faith.

You also have a second "get out of jail card" when paying estimated taxes in the form of being able to pay 90% of the estimated taxes which are due, and by doing this you won't incur any interest penalties when you do actually pay the full amount.

There is also the fact that if your total amount of tax payable is less than US$1,000 you won't have to pay a penalty for underpaying on your taxes regardless. Although this is more than likely a move by the IRS to reduce the amount of work they have to put into dealing with small, individual cases of underpayment.

Obviously there are reasons why any of these penalties might be waived which could include serious injury, natural disaster or some other form of force majeure which prevented you from paying your estimated taxes on time, and in full, on the due dates. It is worth mentioning though that if you do consciously underpay on your taxes that even though you might be due a refund at the end of the tax year you'll automatically receive a penalty as a result.

So whenever possible make your estimated tax payments on time and for at least 90% of the amount due - at least that way you can avoid the worst of the financial penalties which come with underpaying on your taxes.

Having to deal with estimated taxes is a pain in the neck for most people, but don't expect the IRS to change their policy on this form of taxation approximation any time soon. 

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