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Understanding Estimated Taxes and Penalties

May 14, 2022 by David Moseman CPA

man reviewing estimated taxes

The IRS requires taxpayers to pay their taxes for a given year in that year. For taxpayers who are employees of companies, their employers must withhold income tax from each paycheck and report it on a Form W-2 early in the following year. If your employer withholds too much, you get a refund. If it withholds too little, you owe taxes. Either way, you can fine-tune your status by filing a new Form W-4 with your employer, as well as any appropriate state tax form.

Paying Estimated Taxes

Estimated tax payments are used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return.

Taxpayers who work freelance, for example, do not have income tax withheld from the income they generate by invoicing clients. They must follow a different route for paying their taxes, and they cannot just wait until April 15 for an accounting of the previous calendar year.

These taxpayers must file their estimated taxes on a quarterly basis: April 15, June 15, September 15, and January 15. (If any of those dates fall on a weekend or a federal holiday, they are due on the first business day after the due date.)

Avoiding Penalties

With some exceptions, failure to have enough taxes withheld could result in a tax penalty. Notes the IRS: “We calculate the penalty separately for each required installment. The number of days late is first determined and then multiplied by the effective interest rate for the installment period.” More details are available on the IRS “Common Penalties” page. Refer to the IRS Fact Sheet on this topic.

Three ways to avoid the estimated tax penalty:

  1. Pay at least 90% of the current year’s tax liability due.
  2. Pay at least 100% of the prior year’s tax liability or 110% if your adjusted gross income (AGI) for the prior year exceeded $150,000. (These amounts may be tweaked in future years.)
  3. Pay at least 90% of the current year’s “annualized income.” Taxpayers who do not receive income evenly over the course of the year, such as snowplow drivers, may use this method by completing Form 2210, Schedule AI.

The penalty may be waived if either of the following occurred:

  • The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty.
  • You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

In addition, no penalty is assessed if either of the following occurs:

  • The total tax shown on your return minus the amount you paid through withholding is less than $1,000.
  • You had no tax liability in the previous year.

This is just a summary. Tax rules may change. To learn more about estimated taxes and  other provisions that may apply visit the IRS site and seek the advice of a qualified tax professional.

For a calendar schedule of due dates for estimated taxes, read our article.

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

Filed Under: Business Taxes, Individual Taxes

Annual Reviews of Federal Withholding for Employees

May 2, 2022 by David Moseman CPA

manager with two employees

The IRS says, “All taxpayers should review their federal withholding each year to make sure they’re not having too little or too much tax withheld.” However, employees may not be aware of the IRS’ suggestion, which is why employers should tell them about it.

Why employees should review their withholding

If they have too little federal income tax withheld, employees may end up owing taxes or being hit with a penalty at tax time. Conversely, if they have too much tax withheld, their paychecks will be smaller — which might hurt them financially, as they must wait until tax time to get a refund.

Employees should submit a new Form W-4 if necessary

All new hires must complete a Form W-4, which helps determine how much federal income tax to withhold from their wages. The employee’s Form W-4 information is driven by a person’s personal and financial situation. If an employee experiences certain life changes during the year, they may need to give you a new Form W-4.

Employees should review their withholding every year if they:

  • Have a spouse who works as an employee.
  • Have two or more jobs simultaneously.
  • Work partially during the year.
  • Have dependents who are at least 17 years old.
  • Claim tax credits such as the child tax credit.
  • Itemized deductions on prior year tax returns.
  • Earn high incomes.
  • Have complex tax returns.
  • Had large refunds or large tax bills for the previous year.

Employees may need to update their W-4 if they experience life changes, such as:

  • Marriage.
  • Divorce or legal separation.
  • Childbirth.
  • Adoption of a child.
  • Retirement.
  • Bankruptcy.
  • Home purchase.
  • Starting a new job or stopping a second job.
  • Their spouse gaining or losing a job.
  • Adjustments to income, such as student loan income deduction.
  • Gain of tax credits or itemized deductions, such as medical expenses, donations to charity, education credit and child tax credit.
  • Gain of dividends, self-employment income, IRA distributions, capital gains, interest income, and other taxable income not subject to withholding.

Although year-end may be a convenient time to review filing and withholding statuses, taxpayers can submit a new Form W-4 anytime. Often, they will see a need to do so after preparing their tax returns each year. Depending on where your employees work, they may also need to review their state and/or local tax withholdings every year.

Direct your employees to the IRS Tax Withholding Estimator

The Tax Withholding Estimator helps employees ensure the correct amount of federal income tax is withheld from their paychecks. Employees can review the Tax Withholding Estimator FAQs if they have questions about using the estimator. Also, they can consult with their CironeFriedberg professional.

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

Filed Under: Business Taxes, Individual Taxes

2022 Payment Due Dates for Estimated Taxes

April 11, 2022 by David Moseman CPA

someone writing a check with sticky note pay estimated taxes

The U.S. income tax system is pay-as-you-go, meaning that you pay taxes as you earn income. According to the IRS, sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when they file their tax return.

If you work for a business and are a W-2 employee, taxes are accounted for as withholdings. If you are self-employed as an independent contractor or freelancer, you pay your taxes quarterly.

You file quarterly taxes with Form 1040-ES, Estimated Tax for Individuals. Using your previous year’s annual tax return, you can use the form’s worksheet to determine if you must file quarterly estimated tax and how much.

For more information on estimated taxes and how they might affect you, consult with your CPA or visit the IRS online. 

2022 Payment Due Dates for Estimated Taxes

April 18, 2022

June 15, 2022

September 15, 2022

January 17. 2023*

* If you file your 2022 tax return by January 31, 2023, and pay the entire balance due with your return, you do not have to make the January 17 payment.

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

Filed Under: Business Taxes, Individual Taxes

Tax-Free Municipal Bonds: Are They Worth It?

March 23, 2022 by David Moseman CPA

Municipal Bonds

One potential investment option is Municipal bonds. They are stable, income-producing vehicles that are primarily used to fund local and state government projects, such as buildings and highways. One positive attribute is that they are tax-free for federal tax purposes. The question becomes – are they right for you, and what else should be weighing in on your decision about whether or not to invest in tax-free municipal bonds?

How do municipal bonds work?

From a tax perspective, if you buy bonds issued by your state or local municipality, you may not be required to pay the corresponding state or local taxes that a nonresident would have to pay. This characteristic makes certain municipal bonds (“munis”) triply tax free.  From an investment perspective, munis do have lower yields than their corporate-backed equivalents which needs to be considered in your decision.

In making your decision, it is wise to compare the yields of taxable investment-grade and government bonds with comparable maturities by using the tax-equivalent-yield formula below:

(tax-free yield) ¸ (1-tax rate)

This calculation gives you the real, post-tax net yield of a corporate bond, which you can then compare to the yield of a municipal bond. This makes the comparison apples to apples. History shows that higher income investors who have higher tax bills benefit more from municipal bond yields than investors who are in the lower tax brackets.

Take a closer look

The principal of municipal bonds, like with other types of bonds, is inversely proportionate to interest-rate fluctuations. Debt securities (bonds) with longer maturities incur greater fluctuations in market value over their maturities as the interest rates rise and fall. During low-interest-rate times, there is a risk to the bond’s principal because interest rates are more likely to rise in the future. This will cause a decline in the principal of the bond, and investors can suffer losses to the principal if they sell a bond prior to maturity.

Depending on the inflation rate, a municipal bond could offer real returns in some years and barely keep pace with inflation in other years. History indicates investing solely in low-yielding munis, though safe, will create minimum growth, if any, in your investments. With that in mind it is best to have a balanced portfolio of bonds and equities to help offset the potential risks of eroding purchasing power.

How safe are they?

It is rare that states or municipalities default on their bonds, but it does happen. Look at the debt crisis in Puerto Rico, which defaulted on four bonds, effecting $22.6 billion in debt. The territory has stated that it will reduce $35 billion in bonds and other claims by more than 60%. Be advised not all munis are insured. Only 5.6% of new municipal bonds issued in 2019 were insured, compared with 46.8% in 2007.

Municipal bonds can offer potential advantages and downsides to investors. These bond issuances tend to be highly rated and have low refinancing risk, low default rates, and a low historical correlation with other major asset classes. But very few insured bonds are coming to market, so there’s a greater need to do your homework.

Whether tax-free municipal bonds make sense for you depends on your income, investment goals, and risk tolerance. Work with financial and tax professionals to see whether munis are right for you.

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

Filed Under: Individual Taxes, Investing

EIDL Borrowers Receive Additional Six-Month Deferment

March 17, 2022 by David Moseman CPA

EIDL Loan deferment

On March 15, 2022, Administrator Isabella Casillas Guzman, head of the U.S. Small Business Administration directed the U.S. Small Business Administration (SBA) to provide additional deferment of principal and interest payments for existing COVID Economic Injury Disaster Loan (EIDL) program borrowers. This will provide a total of 30 months deferment from inception on all approved COVID EIDL loans.

This is the third time in the past 12 months that the SBA has extended the deferment period for the COVID EIDL loans.

The SBA intends this deferment period to provide additional flexibility to small business owners impacted by the pandemic, especially those in hard-hit sectors managing disruption with recent variants, as well as recent supply chain and inflation challenges amid a growing economic recovery.

Read the SBA press release for more information.

 

Filed Under: Not-for-Profit, Pandemic, Small Business

April 2022 Tax Deadlines

March 8, 2022 by David Moseman CPA

Upset man standing on huge tax letters

April is a busy month for tax filing. Be aware of upcoming deadlines in 2022 to avoid penalties. For guidance on your personal tax situation, consult your CPA.

April 1

First Required Minimum Distribution (RMD) by Individuals Who Turned 72 in 2021 RMD is the annual minimum amount you must withdraw from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 72 (70 ½ if you reach 70 ½ before January 1, 2020). IRS link for more information.  

April 11

Report Tips Earned in March 2022 to Employer Use this form to report tips you receive to your employer. This includes cash tips, tips you receive from other employees, and debit and credit card tips. IRS Form 4070

April 18 Deadlines

File 2021 Tax Returns (Form 1040) and Pay Tax Due (except for residents of Maine and Massachusetts) Submit 2021 Tax Returns or An Extension to File and Pay Tax Owed

  • By law, Washington, D.C., holidays impact tax deadlines for everyone in the same way federal holidays do. This year, Maine and Massachusetts taxpayers have until April 19, 2022, to file their returns. Taxpayers requesting an extension will have until Monday, October 17, 2022, to file. IRS Link for more information. 

File Schedule H and Pay Employment Taxes for Household Employees

  • If you had a household employee, you need to withhold and pay social security and Medicare taxes. IRS Link for more information. 

First Estimated Tax Payment for 2022 is Due

  • Estimated tax is the method used to pay tax on income not subject to withholding (e.g., earnings from self-employment, interest, dividends, rents, alimony, etc.). Form 1040-ES

Make Retirement Account Contributions for 2021

  • This includes 2021 contributions, within limits, to your Individual Retirement Account (IRA), Solo 401(k) Plan or Simplified Employee Pension (SEP) Plan for 2021 by Self-Employed if filing of Form 1040 was not extended.

Withdraw Excess 2021 IRA Contributions to Avoid Penalties (if Form 1040 filing was not extended) Contribute to Health Savings Account (HSA) for 2021

April 19

File 2021 Tax Return (Form 1040) and Pay Tax Due for residents of Maine and Massachusetts

  • If you live in Maine or Massachusetts, the tax filing due date falls on April 19, since April 18 is a holiday (Patriot’s Day) in those states.

If you need assistance or have any questions on the information in this article, please call your CironeFriedberg professional. You can reach us by phone at (203) 798-2721 (Bethel), (203) 366-5876 (Shelton), or (203) 359-1100 (Stamford) or email us at info@cironefriedberg.com.

Filed Under: Individual Taxes Tagged With: 2021 taxes, 401(k), tax deadlines

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