Last updated on November 12, 2019 at 09:15 am
April 18 has come and gone, so the tax season is officially over for most people (those who filed extensions will be looking at deadlines of September 15 and October 15 as their last chance). Given that most of the process has passed, now is the best time to review your business income for each quarter to be sure you are paying the correct tax estimates.
Most people have their employer withhold taxes for them throughout the year. However, if you’re self-employed, or a partner in a business partnership, you will need to pay estimated taxes on a quarterly basis to satisfy your tax obligation.
Even though you may want to take a break from thinking about taxes, the most effective time to do a pulse check is when everything is fresh in your mind.
What do you need to do now?
Pay the lesser of either 110% of prior-year tax or 90% of the current year tax split out on a quarterly basis to satisfy your estimated taxes.
What Does This Mean?
If your income is going to drop, then you can manage it quarterly and just pay 90% of what you expect for your next year’s salary.
On the other hand, if you have no income from the prior year and now have a large amount of income in the current year, you can skip estimates and just pay on or before the tax filing deadline in the following year. In this specific case, the lesser amount would be 110% of prior year’s tax because you had no income, making it zero.
If your income is higher at the end of the year and usually lower in the beginning of the year you can measure the income quarterly and may be able to pay limited estimates the first three quarters of the year and then pay the fourth quarter without incurring any penalty.
What if You Forget To File Estimates?
If you forget to file estimates there is a technique to spread your income evenly throughout the year. You can withhold significantly through your W2 when you approach the end of the year. By withholding through the W2, it will be handled as if you had paid estimates evenly throughout the year.
For more detailed information about these tips and other tax ideas, or to discuss how these may apply to your unique situation, please email me at Kenneth.firstname.lastname@example.org.
Ken Bagner is a member of Sobel & Co. LLC. He is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. Plymouth Rock Assurance in NJ is proud to partner with NJCPA to bring you valuable tips for about your financial health. Qualified members of the NJSCPA can receive a discount on their car insurance through Plymouth Rock Assurance New Jersey.