Under the new Tax Cuts and Jobs Act (TCJA) many people will find they now have to pay their taxes every quarter. If that’s you, you need to get the checkbook out as the next tax payment day is the 16th September.
There are two broad groups of taxpayers – those who are employed full-time and have their tax withheld from their pay checks and the rest who need to pay quarterly. According to the IRS Tax Attorney, these include self-employed people, including many involved in the sharing economy, investors, and retirees.
According to the IRS there are some exceptions to this: “farmers, fishermen, casualty and disaster victims, those who recently became disabled, recent retirees and those who receive income unevenly during the year.”
Those who file quarterly still have to file their annual tax return in January but will be paying their estimated tax bill through the year.
It is possible to make just one payment every year but this could be a sizeable sum. The quarterly payments are designed to enable the taxpayer to pay in more affordable, smaller chunks. The IRS however warn, “Taxpayers can avoid an underpayment penalty by owing less than $1,000 at tax time or by paying most of their taxes during the year. Generally, for 2019, that means making payments of at least 90% of the tax expected on their 2019 return.”
That means you can have a tax account in arrears but if you owe $1000 or less you won’t be fined for underpayment at the end of the financial year.
The IRS recognize that people’s lives change for the better or worse. Families grow, marriages break up, businesses do very well or fail. You can adjust your tax payments through the year as these things occur in your world using the Tax Withholding Calculator that has been improved this year too.
The IRS state, “The estimator offers workers, as well as retirees, self-employed individuals and other taxpayers a clear, step-by-step method for effectively tailoring the amount of income tax they should have withheld from wages and pension payments.” This allows for those big changes in your world to be accounted for and you to pay more or less tax as these things transpire.
The tax withholding calculator should also be used by those who have their taxes deducted at source by employers. Your income or family circumstances could result in a higher/lower tax bill. A new baby can reduce your tax burden, as can investment in their college fund as they grow up.
Paying taxes is a pain for everyone, but the government also used to face waves of tax payments that came in torrents and then died away. In everyone paying what they owe on a more regular basis so the income stream is smoother and more predictable.
For you the new tax payment regime allows you to pay in smaller chunks and more regularly. For many, paying once or twice a year this has meant that you forget all your tax burden except in the month or so approaching payment day when you starve and penny pinch to make the payment date! Having four such payment dates allows for smaller chunks and less of a sweat each time ahead of having to find $x,000 for the taxman!
It is possible for those who are into reducing those shocks even further to pay your estimated tax on a monthly basis through the very same systems as the quarterly regime. The IRS sets the quarterly payments as a minimum.
By the time you read this blog the payment date may well have expired. If you have forgotten to make your quarterly payments then there is still time to make a payment – the only time the IRS will chase you hard is should you fail to make your payments by the end of the financial year. Don’t use that as an excuse to procrastinate though – the later you pay the bigger the ultimate bill you will face!
Do use the tax withholding calculator to give yourself an assessment as to how much you owe each month as this can make for lower blood pressure when it comes to making the final payment at the end of the year!