Posted byon January 13, 2009
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After running our projections for the prior tax year, I found we were slightly short of the minimum withholding for our state taxes. Luckily, there’s an easy way to avoid a penalty for our state, you just send in an estimated tax payment, due on January 15.
In addition, because I quit my job last year, I’m planning to make Federal estimated tax payments for next year. They are easy to do; here’s what you need to know if you are planning to make estimated tax payments this year.
Typically, your employer will withhold taxes from your paycheck. If you do not have enough withheld, or if you have other income not subject to withholding, like self-employment income or investment income, you will need to make estimated tax payments.
To avoid penalties, you will need to meet one of the following requirements. You can meet the requirements through withholding, estimated tax payments, or a combination of both. (These rules don’t apply to farmers, fishermen, or higher income taxpayers.)
We’re using the last one, because it’s easy to calculate and much lower than our current taxes will be (because we stopped deferring so much retirement income).
There are two options to make payments:
Estimated tax payments are due quarterly. Although, note the spacing is not every three months:
If you itemize, and want your state withholding counted for the previous tax year, you can pay your January 15 payment in December.
Withholding from an employer is considered to have been paid equally over the year, no matter when the money was withheld. Estimated tax payments are different; there are penalties if a large enough payment is not made during any payment period. See Publication 505, Tax Withholding and Estimated Tax for details on various methods of calculating installments.