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What are Estimated Tax Payments and Why Do I Have to Pay Them?

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One of the most disliked parts of the US taxation system is the need to pay Estimated Taxes — it is often a large check and by writing it, you realize just how much the government is taking in taxes from you each year!

Our tax system is a pay as you go system. When you have a W2 job, your employer takes taxes out of your check and sends the money to the IRS or the EDD (in California) on your behalf.  When you are self-employed (or if you don’t have enough paycheck withholding) you have to send the money in yourself.

If you don’t send in enough money each quarter, you will be assessed an underpayment penalty. This penalty is calculated based on the amount of tax due and the number of days late you pay it.

How much is enough? The IRS has a safe harbor that is based on your income level:

  • If your Adjusted Gross Income (AGI) was more than $150,000 you must pay the smaller of 90% of your expected tax for 2016 or 110% of the tax shown on your 2015 return.
  • If your AGI was less than $150k you must have paid in 100% of your 2015 liability.

Of course, there are lots of exceptions, differing state requirements, and withholding alternatives, so contact your Enrolled Agent for more information.

At Cromwell Tax & Bookkeeping, we help individuals  file accurate returns, stay compliant and avoid penalties.

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