MORE ABOUT QUARTERLY TAX PAYMENTS
- You’re required to make quarterly estimated payments, generally, if you will owe tax of $1,000 or more after withholding and credits.
- The first quarterly payment for the 2005 tax year was due April 15, 2005. The others are due June 15 and Sept. 15 this year and Jan. 15, 2006.
- In some locales, there are state and local requirements for estimated tax payments. Check www.irs.gov or your state tax office.
- Want to learn about exceptions and other fine-print matters? Read Form 1040-ES, the form that accompanies your payment. You can get it from the IRS or your accountant.
- To read frequently asked questions about the requirement, go to www.irs.gov and search for “quarterly estimated.”
The Internal Revenue Service isn’t skimpy on rules or their enforcement. Yet at times, it’s content to quietly feed out enough line for a taxpayer to get thoroughly hooked.
Take estimated quarterly tax payments. As a self-employed individual, you’re responsible for paying your federal income tax in these four installments. Think of it as the withholding taxes that a carrier pays for a company driver – only you’re the employer.
The IRS sends no reminders. No quarterly past-due bills. But when April 15 comes, you’ll face penalties if you ignored the payments.
“We advise everyone to pay the estimated tax,” says Howard Abrams of PBS Tax & Bookkeeping in Tarzana, Calif. “If they don’t, they tend not to have the money when the time comes to pay income taxes.”
When Abrams’ firm prepares a tax return for a client, it also issues quarterly payment vouchers. The vouchers are based on the most common application of the IRS regulations – paying 90 percent of the previous year’s tax bill over the four installments. If a client has a refund coming, Abrams advises that it be applied to the next quarterly payment due. Abrams says about six in 10 clients – more than ever – make quarterly payments.
The cost of ignoring quarterly payments won’t break you. The penalty is one-half of one percent of the tax owed for each month that it’s late. Skipping a year’s worth of estimated payments (the fourth is due Jan. 15) and then paying everything by April 15 means you’ll pay about 3 percent more.
Delay payment further, though, and the money pit really yawns.
First, that half-percent per month penalty will continue. You’ll also start paying 6 percent interest, compounded daily, says IRS spokesman Dan Boone. Then if you don’t file a return on time, you may owe an additional penalty of 4.5 percent per month until it gets filed. Should you have to borrow to pay the taxman, you’ll be throwing away even more in interest expenses, probably at double-digit levels.
Better to squeeze out the quarterly payments than to wait. You’ll save money and a lot of headaches, plus lower the risk of a financial meltdown at tax time.