Estimated Tax Payments – Who is Required to Make Them?
The Internal Revenue Service today reminded self-employed individuals, retirees, investors and others who pay their taxes quarterly that the first estimated tax payment for tax year 2019 is due Monday, April 15, 2019, for most taxpayers. A 2018 tax return and 2019 Form 1040-ES, Estimated Tax for Individuals, can help these taxpayers estimate their first quarterly tax payment.
The Tax Cuts and Jobs Act changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding. The law changed tax rates and brackets, revised business expense deductions, increased the standard deduction, removed personal exemptions, increased the child tax credit and limited or discontinued other deductions. As a result, many taxpayers may need to raise or lower the amount of tax they pay each quarter through estimated tax payments. The 2019 Form 1040-ES and instructions include inflation adjustments for the standard deduction, income tax rate schedules for tax year 2019 and a worksheet to help taxpayers figure estimated tax payments correctly.
Who needs to pay quarterly?
Most often, self-employed people, including some persons involved in the sharing economy, need to pay quarterly installments of estimated tax. Similarly, investors, retirees and others – a substantial portion of people whose income is not subject to withholding – often need to make these payments as well. Besides self-employment income, other income generally not subject to withholding includes interest, dividends, capital gains, alimony and rental income.
Because the U.S. federal income tax is a pay-as-you-go tax, taxpayers are required to pay the tax as they earn or receive income during the year. If a taxpayer didn’t pay enough tax during the year, either through withholding or by making estimated tax payments, the taxpayer may normally have to pay a penalty. Recent major tax law changes affect most taxpayers, and while the vast majority are on track to receive a refund, others are finding that they owe on their taxes. Many taxpayers who owe for 2018 may qualify for a waiver of the estimated tax penalty that normally applies.
For 2019, an estimated tax penalty will generally apply to anyone who pays too little tax, generally less than 90 percent of the tax reported on their 2019 income tax return, during the year through withholding, estimated tax payments or a combination of the two. In addition, individuals who base their payments of estimated tax on last year’s tax will not be subject to a penalty if they pay 100 percent of the tax reported on their prior year’s return (110 percent if their income was more than $150,000).
Employees Have a Choice
Many employees who also receive income from other sources may be able to forgo making estimated tax payments if they increase the amount of income tax withheld from their pay instead of making estimated tax payments. They can do this by claiming fewer withholding allowances on their Forms W-4, Employee’s Withholding Allowance Certificate, by completing the Deductions, Adjustments, and Additional Income Worksheet in the instructions to Form W-4. Taxpayers can also ask their employer to withhold an additional flat-dollar amount each pay period.
How and When to Pay
For tax year 2019, estimated tax payments are due from individual taxpayers on April 15, June 17, Sept. 16 and Jan. 15, 2020. Taxpayers who have not yet filed their income tax returns and are due a refund of their 2018 federal income tax may be able to reduce or even skip one or more of these payments by choosing to apply their 2018 tax overpayment to their 2019 estimated tax.
Taxpayers in presidentially declared disaster areas may have more time to make these payments without penalty. Visit the Tax Relief in Disaster Situations page for details.
Have Questions Regarding Estimated Payments and/or Withholding?
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Any tax advice herein is based on the facts provided to us and on our interpretation of tax legislation as it reads at the time the advice is provided. Tax law is subject to continual change, at times on a retroactive basis and may result in incremental taxes, interest or penalties. We are not responsible for updating our advice for changes in law or interpretation after the date the advice is provided. Every tax situation is different. We are not responsible for the tax implications to any individual or entity that may act on this advice.