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.

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.

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.