NEWS / IRS warns American to pre-pay taxes

The US Internal Revenue Service warned Americans to make a pre-payment of their second quarter estimated tax payments by June 16. Failure to do so can result in underpayment penalties and interest come tax time next year.

Estimated tax payments mostly apply to individuals earning income from self-employment, real estate rental, interest, dividends, or any other sources that do not withhold federal income, Social Security, or Medicare taxes. The IRS therefore requires individuals to make 4 estimated tax payments throughout the year: by April 15 (for the months of January, February, and March), by June 15 (for the months of April and May), by September 15 (for the months of June, July, and August), and by January 15 of the next year (for the months of September, October, November, and December).

In order to avoid penalties, individuals must make 4 equal payments totaling at least 90% of the tax due for the year or 100% of the tax due for last year (110% if the total annual income last year was $150,000 or more).

Individuals whose income is not even throughout the year or who do not know how much they will make this year can “annualize” their income by taking the income earned in a given quarter, multiplying it by a certain multiplier (4 for quarter 1, 2.4 for quarter 2, 1.5 for quarter 3, and 1 for quarter 4) and then figuring out the income, Social Security, and Medicare taxes due for the entire year based on the expected annual income calculated that way. If income exceeds certain thresholds, individuals may also be required to calculated the expected Alternative Minimum Tax, Additional Medicare Tax, and Net Investment Income Tax.

Once the total tax amount is determined for the year, that amount can be divided by a divider (4 for quarter 1, 2 for quarter 2, 1.5 for quarter 3, and 1 for quarter 4) to determine how much tax would need to paid. The amounts withheld by an employer or other withholding agent as well as previous quarterly taxes paid for the year are then subtracted. If the remaining number is positive, that number would need to paid in by the given due date.

The problem with the second quarter payment is that it only covers 2 months of income, but the IRS expects to see a payment as if that were a full-fledged 3-month quarter. On the other hand, the final quarter covers 4 months of income, so the overpayment in the second quarter eventually evens out.

Certified financial planner Nathan Sebesta, owner of Access Wealth Strategies in New Mexico, was quoted by CNBC as saying that the second quarter estimated tax payment “often sneaks up on people.”

If you require assistance with making quarterly payments or filing other paperwork with the IRS, feel free to contact us at info@apostille.us or (212) 233-7061. You can also place an order on our website.