Paule, Camazine & Blumenthal, P.C. posted in Tax Planning on Wednesday, January 29, 2014.
The IRS does not receive our individual income tax dollars just on April 15th. If we all were supposed to wait to April 15th to pay 100% of our tax from the prior year, people may have trouble coming up with that much cash, and the number of people behind on their taxes would increase.
To avoid this problem, federal law requires the IRS to collect individual income tax dollars throughout the year as people generate income. The IRS does this by withholding tax from our paychecks and also by people making estimated income tax payments. Most people have had tax withheld from a paycheck, so they understand that. But what are estimated income tax payments?
In general, estimated income tax payments are required for those people who for whatever reason expect to owe $1,000 or more of tax in excess of the amounts withheld from their paychecks (although there are certain exceptions). The excess tax can be made in four payments spread throughout the year (the deadlines are on or close to April 15th, June 15th, September 15th, and January 15th of the next year), and the payments can be made with IRS Form 1040-ES. Certain penalties apply if you are required to make estimated income tax payments and fail to do so.
A couple common situations where people find it necessary to make estimated income tax payments are if they own a small business or if they are a beneficiary of an estate or trust.
Avoiding penalties and paying tax as you earn income so you do not have to come up with a large amount of cash on April 15th are some of the benefits of making estimated income tax payments.
Additionally, this is not simply a federal tax concept. Many states impose income taxes on individuals and also have their own estimated income tax payment requirements.
If you have any questions about making estimated income tax payments, you should consider seeking the help of a tax professional.