The Internal Revenue Service today reminded taxpayers who pay estimated taxes that Monday, June 17, is the deadline for the second estimated tax payment for 2019.

Examples of those who often need to pay quarterly estimated taxes are self-employed individuals, retirees, investors, and some individuals involved in the sharing economy, among others.

The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, changed the way tax is calculated for most taxpayers, including those with substantial income not subject to withholding. Most TCJA changes took effect in 2018. As a result, many taxpayers ended up receiving 2018 refunds that were larger or smaller than expected, while others unexpectedly owed additional tax when they filed earlier this year. Because of this, taxpayers should consider whether they need to adjust the amount of tax they pay each quarter through estimated tax payments.

Estimated Tax Form

Joe Franek Tax Services here in Cary can help taxpayers figure these payments simply and accurately. Just give us a call (919) 637-6731.

Or if you prefer to DIY, a companion publication, Publication 505, Tax Withholding and Estimated Tax, has additional details, including worksheets and examples, which can help taxpayers determine whether they should pay estimated tax. This includes those who have dividend or capital gain income, owe alternative minimum tax or have other special situations.

Who needs to pay quarterly? 

I’ve noted this in many blogs, but to be clear those who need to pay quarterly taxes are most often, self-employed people, including some individuals involved in the sharing economy, need to pay quarterly installments of estimated tax.

Similarly, investors, retirees and others – a substantial portion of whose income is not subject to withholding – often need to make these payments as well.

Other income generally not subject to withholding includes interest, dividends, capital gains, rental income and some alimony.

Because the U.S. tax system operates on a pay-as-you-go basis, taxpayers are required by law to pay most of their tax liability during the year. For 2019, this means that an estimated tax penalty will normally apply to any party that pays too little tax, usually less than 90 percent, during the year through withholding, estimated tax payments or a combination of the two.

Exceptions

Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled, recent retirees, and those who receive income unevenly during the year. In addition, there’s an exception to the penalty for those who base their payments of estimated tax on last year’s tax. 

Generally, taxpayers won’t have an estimated tax penalty if they make payments equal to the lesser of 90 percent of the tax to be shown on their 2019 return or 100 percent of the tax shown on their 2018 return (110 percent if their income was more than $150,000). See Form 2210 and its instructions for more information.

Employees Have a Choice

Many employees who also receive income from other sources may be able to forgo making estimated tax payments and instead increase the amount of income tax withheld from their pay. One way they can do this is by first completing the Deductions, Adjustments, and Additional Income Worksheet in the W-4 instructions and then claiming fewer withholding allowances on the Form W-4 they give to their employer. Alternatively, they can ask their employer to withhold an additional flat-dollar amount each pay period on their Form W-4. 

Perform a Paycheck Checkup

With many key tax changes now in their second year, the IRS (and Joe) urges all employees, including those with other sources of income, to perform a Paycheck Checkup now. Doing so now will help avoid an unexpected year-end tax bill and possibly a penalty.