What to do if you forgot to make estimated tax payments?
Colorado Business CPA, LLC
June 19, 2017
What to do if you forget to make timely estimated tax payments?
Based on the safe harbor rule, taxpayers who earn less than $100,000 a year should pay their last year tax liability before December 31st of the current year. Taxpayers who earn more than $150,000 a year should pay 110% of tax liability the previous year.
As a matter of fact, when you only work as a W-2 employee and all your income comes from that employment, you are not that concerned about making estimated tax payments. As long as you fill out your form W-4 correctly when you were hired, you should be fine since the proper tax amounts will be taken out from each of your paychecks for the year.
The risk of not paying enough taxes typically only comes up when you are a self-employed individual. A self-employed individual has to make estimated tax payments quarterly on the following dates 04/15, 06/15, 09/15 and 01/15 (of the next year). You make these payments to the IRS as well as to the State.
When you’re an S-corporation shareholder, your compensation is received via two sources. You are compensated as a W-2 employee and through shareholder’s distributions. A portion of your taxes will be taken care of via W-2 compensation; however, you still need to make estimated tax payments to cover taxes on distributions.
A lot of my clients are asking me what to do when you miss the deadline to pay quarterly estimated tax payments. There are a few options to that. First, pay your quarterly payments as soon as you can. You might incur minimum tax penalty for being late, but the penalty will be minimal the sooner you pay.
Second option would be to pay more taxes with your payroll. Payroll taxes paid via payroll Federal and State Income tax withholding is treated as if they were made throughout the year, thus, eliminating failure to make timely estimated tax payment penalty.
Third option would be to compare your tax liability, (that is your earnings from last year) and get some tax planning done. Perhaps you will not even owe as much as you did in the previous year due to less income earned. You might have more tax planning deductions implemented than you remember. Your previous year refund could have been applied toward your current year estimated tax.
With this said, don’t forget to come to one of our half-day events where we will be addressing tax payments, tax planning and other questions you will have!