Eliminate Penalties Resulting from Estimated Tax Payments

Since the federal income tax system is pay-as-you-go, you are required to pay taxes on income you earned or received during the tax year.  The two ways to pay-as-you-go are withholding or estimated tax payments.

Employers typically withhold income tax from their employees pay.  The amount withheld is paid to the IRS in the employee’s name.  Tax withholding is usually done on salaries and wages, tips, fringe benefits, sick pay, pensions and annuities, gambling winnings, unemployment compensation and certain federal payments.  Be sure to classify your workers correctly.  Misclassifying a worker as an independent contractor instead of employee can be a costly mistake with large penalties and interest.

If you do not have tax payments withheld from your taxable income you may be required to pay estimated tax payments.  Estimated tax is used for income tax, self employment tax, and alternative minimum tax.  If you receive income from self employment, sale of assets, interest, dividends, capital gains, rent, and royalties you may be required to pay estimated taxes.  People that are in business for themselves typically pay their taxes this way.  If all your income will be subject to tax withholding you most likely will not be required to pay estimated tax, however, you may pay too much in taxes so be sure to pay yourself by determining reasonable compensation. 

If you do not pay enough tax through the year from withholding or estimated tax payments you may be subject to a penalty.  If you are not sure how to figure your penalty for underpaying your taxes the IRS can figure it for you.  If you think you owe the penalty simply file your tax return and the IRS will determine the penalty and send you a bill.

As business owner and entrepreneur taxes are a monthly event.  Whether you are paying sales tax, employment taxes, federal or state taxes be sure to include tax planning in your business plan on a monthly or quarterly basis to minimize tax surprises and lower your tax burden.

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