Another important tax day has come and gone without any fanfare and I bet no one reading this knows what day I’m referring too. June 15, the day your second quarterly estimated payment is due. Although most of us who are employed and receive a W-2 at the end of the year don’t have to worry about making these payments, it is still good to understand because situations can change very quickly and you don’t want to get hit with a penalty for failure to pay.
As I’ve mentioned before, our tax system is pay as you go which is why we have taxes withheld from our paychecks. But there are many reasons why people need to file these estimated payments throughout the year and you may be one without even realizing it.
Quarterly estimated tax payments are due four times during the year, on April 15, June 15, September 15, and January 15. The basic concept behind these payments is that if you will owe $5,000 in taxes at the end of the year, the govt. wants you to pay them in installments. Everyone, including the govt., knows it is easier to pay $1,250 every four months than have to come up with $5,000 at once.
Here are the most common reasons why you may owe estimated payments.
1. Self-employed – Since there are no taxes withheld, estimated payments must be paid.
2. W-2 employee has too little withheld from each paycheck.
3. Tipped employees, such as waiters/waitresses, bartenders, and bus boys (and girls!) – It is a very common practice for restaurant owners to only withhold taxes based on your hourly wage (which is almost non-existent). But the tips you declare are also taxable and therefore you may come up short at the end of the year.
4. Significant investment income, such as dividends and interest.
5. Alimony
6. Winning prizes/awards – depending on the amount/value of the prize, this may trigger the need for estimated payments.
2. W-2 employee has too little withheld from each paycheck.
3. Tipped employees, such as waiters/waitresses, bartenders, and bus boys (and girls!) – It is a very common practice for restaurant owners to only withhold taxes based on your hourly wage (which is almost non-existent). But the tips you declare are also taxable and therefore you may come up short at the end of the year.
4. Significant investment income, such as dividends and interest.
5. Alimony
6. Winning prizes/awards – depending on the amount/value of the prize, this may trigger the need for estimated payments.
As we get older and our financial situations evolve and become more complicated, it is important to understand the tax consequences. It is not very pleasant to learn at the end of the year you owe taxes and penalties in one lump sum when you could have been paying in small increments throughout the year.
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