How do estimated taxes work?
Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. This applies mostly to people who are not receiving w2 wages (taxes withheld from their paychecks); however, if taxes withheld from your salary or pension are not enough this also includes you! “If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.” – IRS
How do I know what I am supposed to pay in estimated taxes?
Any good CPA or tax preparer will include vouchers with your tax returns and also highlight the amounts due based on the previous year. These amounts are the minimum you are supposed to pay, operating under the assumption that your current year income will stay the same or be greater. For businesses grossing over 1mil per year, we advise your tax preparer review your financial reports on a quarterly basis to make sure your estimated payments are aligned with your current schedule. You will not be penalized for paying less than you should as long as you are paying the estimated taxes based on pervious years returns; however, you want to make sure you are accounting for changes.
Due to COVID revenues are expected to be greatly affected this year. Do I still need to make estimated payments?
Have your accountant or bookkeeper pull your current YTD reports and make sure that your numbers are already severely affected. Remember you still have two quarters to go so if you miss your payments and you end up making that income back you will want to make sure the payments are not penalized for being late.
Federal guidance states “If your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. “ Generally, “the penalty may also be waived if 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” It is important to note that this guidance is from the IRS and may or may not apply to individual states. It is also important to note that at this current time it is not clear if this rule will stand since they have already pushed back deadlines to original dates. Nor are we certain if this applies at a state level. Give these two perspectives of uncertainty, we are advising that payments be made or properly readjusted with YTD backup and projections. We do not advise simply not paying.
Is there someone who can prepare the estimated taxes for me?
Yes, we have tax preparers standing by to address your concerns. Contact us today and unlock the key to how easy this process can be!