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A Simple Guide That Will Help You Understand Estimated Tax For Individuals Better

If you’re starting a new business, it can become challenging trying to understand estimated taxes. Most business owners have enough issues to deal with without having to navigate into IRS grounds. Estimated tax is the technique used to pay tax on income that’s not subject to withholding. In most cases, this affects self-employed individuals. It also includes income from interest, dividends, rent, alimony, or profits from assets’ sales. The scenario is different if you’re an ordinary taxpayer. Typically, you receive salary and wages from your employer and never think about making estimated tax payments. In this guide, you’ll learn everything you need to know about estimated tax payments.

Who Pays Estimated Tax?

If you’re filing tax as a sole proprietor, partner, or self-employed individual, you need to make estimated tax payments. This means you’ll owe a tax of $1,000 or more when filing your returns. However, the case is different for corporations. According to https://silvertaxgroup.com/everything-about-irs-fresh-start-program/, corporations need to make estimated tax payments if they should owe tax of $500 or more when filing returns. If you had a tax liability for the previous year, you might need to pay the current year’s estimated tax. Consider working with a tax professional for the best results.

Who Doesn’t Pay Estimated Taxes?

First, you’re an employee. If you’re employed, your employer should withhold quarterly taxes on your behalf. In some cases, they can fill the incorrect amounts. To avoid such issues, ensure you fill out Form-W4. Next, give it to your employer and ensure they’re deducting the correct figures. Second, you have a special case. To fall under this criteria, you need to show you didn’t owe money in the previous tax year and didn’t have to file a tax return. Also, you need to prove you were a US citizen or resident for the specific tax year. If you don’t meet the two selections above, you need to pay estimated taxes.

The best Option to Choose

This is a tricky area and depends on your situation. However, try and avoid an underpayment penalty. You should aim for 100% of your previous year’s taxes. This means you won’t need to pay an estimated tax penalty, no matter how much tax you owe. Sometimes, your income for a particular year can be less than your previous year. When this happens, you can consider paying 90% of your estimated current-year tax payment. If your payments add up to less than 90% of what you owe, you can face an underpayment penalty.

When Should You Pay Estimated Taxes?

For estimated tax calculations, a year is divided into four payment phases. Every phase has a payment due date. Failing to pay estimated tax by the due date of each payment phase results in penalties. As a general rule, pay your estimated tax weekly, bi-weekly, monthly, etc.

Hopefully, this guide provides you with insights to help you understand estimated taxes. The area of tax is complex, and you need professionals to explain the challenging topics. Consider visiting a CPA to help you make your estimated payments. Avoiding penalties is in your best interest. Remember: avoid accruing more penalties under your name. Pay your estimated taxes today!

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