By the time tax season rolls around, you are supposed to have paid the majority of your taxes already, and can be penalized if you haven't. The process of paying your taxes during the year is known as withholding.
• Describes tax withholdings and methods of withholding
• Explains how tax estimating works
• Warns of possible penalties
If you want to avoid costly mistakes, while at the same time taking advantage of all credits and deductions, you'll want to do your taxes with TurboTax this year.
TurboTax helps you work quickly and easily, and it double-checks your return to help you get the largest possible refund. You can even file your state taxes and get your state refund (which may be substantial) much faster than if you mail a paper return.
Federal income tax is not intended to be a once-a-year payment to the government. As a taxpayer, you are expected to be paying the tax in installments all year long.
Your tax return should never be accompanied by an enormous check covering your entire yearly federal tax. In fact, this sort of procrastination will cost you.
The IRS penalizes taxpayers who have to pay more than 10% of their tax when they file their annual tax return. April 15th should not be thought of as a due date for an annual tax payment but as a deadline for assessing your yearly tax contribution and adjusting for any deficiencies or surpluses.
Paying federal tax is an ongoing process and you are required to make tax contributions as you earn your income. To accomplish this, there are two methods available to you:
Employer Withheld Tax Payments
Most taxpayers have their employers withhold taxes from their paychecks. When you were initially hired, your employer most likely had you fill out Form W-4, the "Employee's Withholding Allowances" worksheet.
This form includes instructions for determining your allowances (not to be confused with exemptions). The IRS has designed the worksheet so that if the directions are followed and you claim the correct number of allowance, they can estimate the tax you will owe for the entire year and can then withhold enough from your paycheck so that your withholding will equal your tax liability.
Make sure you do not over claim your allowances when filling out your W-4. If you do, too little tax will be taken out and at the end of the year you will not only owe a large amount of taxes, you will also have to pay the penalty the IRS imposes for making under-payments.
Estimating Quarterly Tax Payments
Filling out Form 1040-ES "Estimated Tax" is an extra hassle but it is necessary if you make large amounts of taxable income not subject to any federal income tax withholding.
Such income could be from self-employments, interest, dividends, rental income, or capital gains. If this description applies to you, you should fill out Form 1040-ES, which is, essentially, a mini-tax return. (You can find the form on our download page for federal tax forms.)
This form will walk you through the necessary calculations and will determine the amount you will need to contribute four times a year.
If your income from these other source is fairly consistent, you should make equal contributions on June 15, September 15, January 15, and April 15. You should send this payment in with your IRS provided voucher or, if this is your first installment, your 1040-ES form.
If you think that you may owe money over the 10% withholding limit, you should still fill out a normal return, along with the 1040-ES. The TurboTax Premier online interview includes additional information to help you estimate withholdings for next year, so that you won't have to pay additional penalties.
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Under-payment of your tax will result in a penalty and added nuisance. If you are concerned that you may need to pay a penalty it is a good idea to fill out Form 2210 "Under-payment of Estimated Tax".
To make the completion of this form simple, have a copy of your current tax return in front of you. Most of the worksheet just asks you to transfer number from your tax return to the worksheet. The second part of the worksheet walks you through the computation of your penalty.
Typically, the penalty is the difference between 90% of what you should have paid and the amount you actually paid. After filling out the worksheet, you should attach it to your tax return before filing it with the IRS.
Other compensation such as sick pay, social security benefits, pensions, and unemployment compensation should also have tax withheld. Fill out the appropriate form to alert your employer, the government or another source of your wish to withhold of portion of the earnings for tax purposes.
The forms are:
• W-4P - Pensions
• W-4S - Sick Pay
• W-4V - Unemployment Compensation and Social Security Benefits
You can get more information about tax withholding and estimated tax directly from the IRS, in the form of Publication 505.