“…in this world nothing can be said to be certain, except death and taxes.” The prescient words of Benjamin Franklin never seemed more appropriate than when we pay our share of taxes to the government.
Most taxpayers are used to receiving a regular paycheck with taxes removed before they get the check. When it is time to file your annual tax returns, if you don’t have any other income, it is a very simple task and you may even get to look forward to a refund. For everyone else, it becomes more complicated.
If you are a U.S. citizen, resident alien, nonresident alien, or a resident of a U.S. territory, you must pay estimated tax if you meet the requirements set forth by the IRS. These requirements are described below.
If you are self-employed, a shareholder in an S corporation, file as a sole proprietor or sell assets (including stocks) in addition to owing taxes of at least $1,000, you will need to pay estimated taxes. Corporations usually have to pay estimated taxes if they expect to owe more than $500 in taxes. Winners of prizes, for example those won on game shows, gambling and lottery winnings owe estimated taxes, as do those individuals that did not have enough taxes withheld from their paychecks, including salary and pension.
In addition, according to the IRS, “those expecting their withholding and refundable credits to be less than the smaller of either 90% of the tax to be shown on your 2014 tax return, or 100% of the tax shown on your 2013 tax return will have to pay estimated taxes.” This does not mean that you do not owe tax if you make more money than in a previous year. On the contrary, you will not be required to pay a penalty for underpayment, but you will have to pay taxes based on your tax return for that year.
The process of paying estimated taxes is not very difficult, but the stakes are higher because if you do not pay, do not pay enough, or (of course) are late with your payment you will have to pay a penalty.
That gets us to figuring out how much you owe. Form 1040-ES includes a worksheet, instructions and information about paying estimated taxes. This document tells you what data you will need to complete the form, as well as instructions on making payments once you deduce your estimated tax.
Estimated taxes are paid usually paid quarterly. The easiest way to pay them is online, directly to the IRS. They have a website that offers several different options for payment, depending on your individual situation. Other payment options include telephone and mail (check or money order.)
Rhode Island (and other states for that matter) has its own requirements for paying estimated taxes. You can find information on the Rhode Island estimated tax payments in this document.
We can work together to make sure you pay the proper amount of estimated tax in a timely manner and avoid any penalties. The forms can be cumbersome, especially for those without experience paying estimated tax. I can be reached by email or by phone at (401) 383-6894.