You may have to make estimated tax payments if you earn income that is not subject to withholding, such as income from self-employment, interest, dividends, alimony, rent, realized investment gains, prizes, and awards.
You also may have to pay estimated taxes if your income tax withholding on salary, pension, or other income is insufficient or if you had a tax liability for the prior year. Please consult a professional with tax expertise regarding your individual situation. (1)
How to Pay Estimated Taxes
If you are filing as a sole proprietor, a partner, an S corporation shareholder, and/or a self-employed individual and expect to owe taxes of $1,000 or more when you file a return, you should use Form 1040-ES, Estimated Tax for Individuals, to calculate and pay your estimated tax. You may pay estimated taxes online, by phone, or by mail. (2)
How to Figure Estimated Tax
To calculate your estimated tax, you must include your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. Consider using your prior year's federal tax return as a guide.
When to Pay Estimated Taxes
The year is divided into four payment periods for estimated tax purposes, each with a specific payment due date. If you do not pay enough tax by the due date of each payment period, you may be charged a penalty, even if you are due a refund when you file your income tax return.
Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in taxes after subtracting their withholdings and credits. They may also avoid the penalty if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. (2)
Here at Dominion Wealth Management, we specialize in helping our clients establish a streamlined and easy-to-manage tax system as part of our comprehensive financial planning services. We'll work with you to determine what works best for you and your unique situation. If you're ready to start this process, give us a call today.
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Sources:
1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.
2. IRS.gov, 2021
3. FMG Suite, 2023.
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