If you're self-employed or you have income from which taxes aren't withheld, the Internal Revenue Service requires you to make estimated tax payments each quarter. By the time tax day rolls around, you should have already paid most of the taxes you owed. It that isn't the case, the IRS can hit you with a penalty for late payment. You could also face a penalty if you don't pay your quarterly tax installments on time. How much of a penalty depends on the amount of taxes you owe and how late you are with your payment.
Quarterly Tax Basics
Quarterly estimated taxes are due on April 15, June 15, September 15 and January 15. You can use the IRS Estimated Tax Worksheet that is part of Form 1040ES to figure your estimated taxes and divide the payment into four equal installments, or you can base your estimate on your previous year's taxes. You must make quarterly payments if you expect to owe more than $1,000 in taxes for the year.
If you're late making a quarterly payment, the IRS has the option of charging you interest on the money you owe for each day that you are late paying your taxes. The rate of interest is tied to the market rate of interest. If you're only a few days late and you only owe a small amount, the penalty will be negligible and the IRS may waive it. However, if you skip making a quarterly payment altogether, you could be charged for each day you fail to pay the taxes, which could add up to a significant amount over time.
If you have variable income over the year and don't have any income at all during one quarter, you would still over quarterly taxes if you figure them by the usual method of paying your total tax bill in even installments throughout the year. However, you have the option of choosing to annualize your payments. With this method, you refigure your tax bill at the end of each quarter, based on your income for the year so far. You'll pay more taxes in the quarters where you make more money. You'll need to file Form 2210 -- Underpayment of Estimated Tax By Individuals, Estates and Trusts to avoid a penalty when you use the annualized method.
Use Form 2210 to figure the penalty you owe for underpayment or late payment of your quarterly taxes. The IRS will waive the penalty on skipped, late or inadequate quarterly payments if you can prove you qualify to use the annualized method. You can also request a waiver of the penalty due to a disaster, casualty or other unavoidable circumstance, or if you became disabled or retired during the year.
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