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Estimated Taxes: How Do They Work?


Posted in on June 29, 2018

There is a pay-as-you go system in the United States for income taxes. A pay-as-you-go system means that workers are expected to send money in to the Internal Revenue Service (IRS) throughout the year as they earn income, rather than waiting until the end of the year when tax day roles around to pay the entire amount of taxes due.

For most workers, their employer takes care of submitting their required tax payments on an ongoing basis. Employees complete a withholding form when they are hired, and employers use the information from this form in order to determine how much money should be held back from a worker's pay check and sent to the IRS.

However, those who earn a lot of income from sources other than wages will not have an employer to take care of this for them – but they are expected to still pay taxes on their earnings as money comes in. Those who get money from other sources besides wages should talk with a Maryland tax attorney in order to find out if they will have to pay estimated taxes and to get help determining when and how to pay.

How Do Estimated Taxes Work?

Those who earn money from interest; dividends; alimony; self-employment income; investment sales; or rental real estate may need to pay estimated taxes on the income they have coming in.

Not everyone has to pay estimated taxes if they earn only a small amount of non-wage income. The key question is how much money you are likely to owe and whether enough is being withheld from your various sources of income to cover much of what you are expected to pay.  You will likely need to pay estimated taxes if:

  • You'll owe more than $1,000 in taxes for the current tax year after subtracting any money being withheld.
  • More than 10 percent of your total tax bill will be unpaid even after accounting for any withholding.
  • Your total withholding will add up to less than 100 percent of the taxes that you owed on your prior year's return.

If you are required to make estimated tax payments, you will need to make payments throughout the year in order to avoid underpayment penalties. You can try to estimate what you will owe on your taxes and pay in at least 90 percent of that amount in order to avoid underpaying but this isn't always possible. One of the safest approaches is simply to ensure that your total amount paid in – including withholding and estimated tax payments -- is large enough to add up to 100 percent of the taxes you owed last year.

Estimated tax payments are typically made in four equal installments throughout the tax year using Form 1040-ES. For 2018, the dates that estimated payments should be made are April 17, June 15, September 15, and January 15, 2019.

If you are not sure if you should pay estimated taxes, need help calculating the amount to pay, or want other assistance in complying with tax rules when you earn non-wage income, you should reach out to a Maryland tax attorney for help.

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