How often do you pay income tax? If you are like most of us, it seems that you only pay income tax once a year…somewhere around April, I think. However, the Federal income tax is actually on a pay-as-you-go system, where you must pay the tax as you earn or receive it. For employees, that means the employer withholds taxes from each paycheck and sends it in for the employee, you see this information on your W-2 that you use to prepare your tax return. If all of your income comes from your employer, you probably do not need to pay additional estimated tax, provided you have filled out the W-4 correctly for your employer. You may also elect to have taxes withheld from Social Security and retirement income as well as other investments, though most do not make this election.
However, if you have income in addition to (or outside of) employment or if your withholding is not enough, you are required to pay estimated taxes throughout the year. This includes income from self-employment, investment income, rents, prizes and awards, etc. You must pay this estimated tax quarterly, and if you do not pay enough by the due date of each quarterly payment period, you may be charged a penalty and/or have your refund reduced by the penalty amount. But it’s not all bad news. If most of your income came toward the end of the year, you can alleviate at least some, if not all, of the estimated tax penalty. This is because you pay the tax as you earn or receive the income; so you can report the differences in income for the year and reduce or remove the penalty.
Who Has to Pay Estimated Tax?
If you owed additional tax for the prior year (i.e. did not have enough withheld), you may have to pay estimated tax for the current year. Also, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return, and you expect your withholding to be less than the smaller of 90% of the total tax on your current year tax return or 100% of the tax shown on your previous year’s tax return (assuming a 12 month return).
When to Pay Estimate Taxes
For estimated tax purposes, the year is divided into four payment periods, with each period having a specific payment due date. If you do not pay enough tax by each due date, you may be charged a penalty (even if you are due a refund) when you file your tax return. The payment periods and due dates for 2018 are as follows:
Installment Tax Period Due Date
First Jan 1 – Mar 31 Apr 17, 2018
Second Apr 1 – May 31 Jun 15, 2018
Third Jun 1 – Aug 31 Sep 17, 2018
Fourth Sep 1 – Dec 31 Jan 15, 2019
How to Pay Estimated Taxes
You can use Form 1040-ES (Estimated Tax for Individuals) to file your quarterly estimated payments. You can also make all of your federal tax payments using the Electronic Federal Tax Payment System (EFTPS), which will also make it easier for you to access your payment history. You may also pay more often (weekly, bi-weekly, monthly, etc.), as long as you have paid enough in by the end of the quarter.
Hopefully, this has helped to clarify a bit of how and when income tax is paid. For any questions you may have on the subject, please contact us or your tax accountant; we can also prepare an estimate for you for the current year to help you plan for the coming tax season.
-Heritage Accounting and Tax Services