Should I make estimated payments?

There is often confusion surrounding estimated payments and when and why they need to be made.

As I work through tax season a question often comes up around the topic of estimated tax payments. This question may be from me as to whether the taxpayer made the 2016 estimated tax payments we had set them up with, or it may be from the taxpayer as to why we have set them up with estimated tax payments for 2017. In either case, there is often a great deal of confusion surrounding estimated payments and when and why they need to be made.

The majority of individual income tax payments to the government are from withholding from wages and retirement plans and other income. However, some individuals have income where no withholding took place including interest, dividends, capital gains, and social security. Whether or not there has been withholding there may be a tax obligation resulting from this income. Outside of withholding the most common other form of individual tax payments to the taxing agencies is in the form of estimated tax payments.

If you do not have sufficient withholding or make adequate estimated tax payments throughout the year, most taxing agencies will charge you a penalty and interest. The IRS and other tax agencies do not care how they get the payments whether it is through withholding or through estimated tax payments, but in many cases the funds must be paid throughout the year. Estimated tax payments are the sole responsibility of the person receiving the untaxed money.

Some of my clients avoid making the estimated tax payments that we set up for them because they figure that they will just pay the balance due at the tax filing deadline. However, if the taxpayer fails to make adequate estimated tax payments or have sufficient withholding then penalties and interest charges will result. I have a couple of clients who refuse to pay the estimated tax payments throughout the year, but are frustrated and upset when they incur penalties. You really cannot have it both ways and need to choose whether you want to wait and pay the interest and penalties, or avoid those and make the timely payments throughout the year.

Individuals, including sole proprietors, partners, and S corporation shareholders generally need to make estimated tax payments if they expect owe federal income tax of $1,000 or more when their return is filed. You may be able to increase your federal withholding from other income sources where withholding is available to avoid paying estimated taxes throughout the year.

Estimated tax payments are due four times throughout the year on April 15, June 15, September 15 and January 15 (for the prior year). If you do not pay enough tax by the due date of each of the payment periods you may be charged a penalty even if you are due a refund when you file your income tax return. It is extremely challenging to explain to a client that they are overpaid on their total taxes, yet have an underpayment penalty because they did not consistently make the estimated payments throughout the year.

To make the estimated tax

payments you can send a paper check along with IRS Form 1040-ES. You can also choose to pay electronically by enrolling in the IRS Electronic Federal Tax Payment System, or EFTPS, or you can choose to use the Direct Pay option available from the IRS.

Finally, it is important to keep a record of the estimated tax payments you actually do make throughout the year as you will need to report these at tax filing time. Some of my clients make all of the estimated payments we set them up with, some make none, and others choose to make some payments of different amounts to set up. A tax return cannot be accurately prepared without knowing the amounts and timing of any estimated tax payments, and a tax preparer cannot quickly and easily find this information on their own due to security concerns.

Paul Pahoresky is a partner in the accounting firm of JLP CPAs. He can be reached at 440-9741040x14 or at paul@ jlpcpas.com. Consult your tax advisor for your specific situation for additional information and guidance on these topics.