If the bulk of your taxable income is from wages, your tax liability is probably being covered by withholding from your paychecks. However, if you have income that is not subject to withholding, you may need to pay quarterly tax estimates.
Many taxpayers who switch from being an employee to being self-employed find out about the quarterly estimate requirements after it is too late. Along with income tax, self-employed individuals must include FICA taxes in their tax estimates.
If you have acquired income-producing property, you may have a tax increase that is large enough to require quarterly estimates. Quarterly payments may be necessary even though taxes are being withheld from your wages or retirement income.
If you fail to pay required income tax estimates on time, the result may well be a penalty plus interest. Here are the rules.
- General rule. The general rule is that at least 90% of your income tax must be prepaid either by withholdings or by estimated tax payments. If you fall short of that, you may be able to avoid penalties if you meet the “safe harbor” rules.
- Safe harbor rules. Taxpayers with adjusted gross income (AGI) of $150,000 or less can avoid underpayment penalties by prepaying an amount equal to 100% of last year’s tax liability. Those with AGI of over $150,000 must prepay 110% of their prior-year tax liability.
There’s no penalty if your underpayment is less than $1,000. Special rules apply to farmers and fishermen. Due dates:
- The first quarterly payment for 2013 was due on April 15.
- The second payment due date is June 17, and the third is September 16.
- The final 2013 payment is due on January 15, 2014.
If you have a significant change in your income from last year, you may want to review your estimated payments. If the new Medicare surtaxes will hit you, your estimated taxes may also be affected. We will gladly assist you in determining your prepayment requirements. Give us a call at (813) 514-8273.