Thinking Ahead: Paying Estimated Taxes is Advised in Some Cases
By Christine Hall, CPA, Hall, Murphy & Schuyler
Tax season is finally over and most folks have filed their tax returns for 2015. Based on their 2015 tax return, many taxpayers have been set up with quarterly estimated payments for 2016. Every year we are asked the same question, “Do I have to pay these estimated payments?”
If you owed additional tax for the prior year, you may have to make estimated tax payments for the current year. Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. 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.
In most cases, you must pay estimated tax for 2016 if both of the following apply.
- You expect to owe at least $1,000 in tax for 2016, after subtracting your withholding and refundable credits.
- You expect your withholding and refundable credits to be less than the smaller of:
- 90 percent of the tax to be shown on your 2016 tax return, or
- 100 percent of the tax shown on your 2015 tax return. Your 2015 tax return must cover all 12 months.
If your adjusted gross income for 2015 was more than $150,000 ($75,000 if your filing status for 2015 is married filing a separate return) you must pay in 110 percent of your 2015 liability to avoid penalty.
If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments. However, if you receive salaries and wages, you can avoid having to pay estimated taxes by asking your employer to withhold more tax from your earnings.
Complete a new form W-4 for your employer and reduce your exemptions. A lower number of exemptions results in more tax being withheld from your paycheck. The most amount of money will be withheld with a single/zero status. Remember, you don’t have to be single with no dependents to ask for that status on your W-4.
Also keep in mind that at times a taxable event in the prior year may make it appear that estimated payments will be due for the current year, when in fact they are not. For instance, if you sell stocks or a piece of investment property at a gain, receive a severance package or win the lottery you will owe tax, but the absence of that event in the current year may negate your requirement to pay estimated taxes for the current year.
Estimated tax payments should be made in four equal installments and do not follow the traditional monthly quarters. The due dates are April 15, June 15, September 15 and January 15. Failure to make the payments by their due dates will result in an estimated tax penalty in most cases.
There are some exceptions to this rule if you do not receive your income evenly throughout the year so give us a call if this pertains to you or if you are unsure as to whether you need to make estimated tax payments.
Hall, Murphy & Schuyler, PC is a full-service public accounting firm. They have a staff of experienced professionals that stand ready to meet all of your accounting, tax and general business needs. For a complimentary consultation, call 706-855-7733 or email at cmh@HMandScpas.com.