The following is a summary of the requirements for paying your estimated quarterly taxes. Individuals: The general rule is that at least 90% of an individual’s final income tax liability is to be paid through either withholding or estimated tax payments. The estimated tax is the amount of income and self-employment taxes, as well as other taxes, reported on Form 1040 that an individual estimates will have to be paid for the tax year after subtracting any estimated deductions and credits.
The payments are made with Form 1040-ES. The payment due dates for an individual are the following:
First installment April 15th
Second installment June 15th
Third installment September 15th
Fourth installment January 15th
No penalty for failure to pay estimated tax will apply to an individual whose tax liability for the year, after credit for withheld tax, is less than $500 for tax years beginning before January 1, 1998. For tax years beginning after 1997, the amount increases to $1,000. Also, a U.S. citizen or resident need not pay estimated tax if he or she had no tax liability for the preceding tax year, provided such year was a 12 month period.
As trading income can be very erratic, with a resulting variable income, the following rules apply:
(1) If the taxpayer becomes required to pay estimated tax after March 31 and before June 1, then the taxpayer should pay 50% of its estimated tax on or before June 15, 25% on September 15, and 25% on January 15.
(2) If the taxpayer becomes required to pay estimated tax after May 31 and before September 1, then the taxpayer should pay 75% of its estimated tax on or before September 15, and 25% on January 15.
(3) If the taxpayer becomes required to pay estimated tax after August 31, then he should pay 100% of his estimated tax by January 15.
Form 2210 “Underpayment of Estimated tax by Individuals, Estates, and Trusts” can be filed if you meet certain exemptions from the penalty. The IRS is authorized to waive the penalty for underpayment of estimated tax if the underpayment is either due to casualty, disaster, or other unusual circumstances and the imposition of the penalty would be against equity and good conscience. The penalty may also be waived for an individual who retired after having attained age 62, or who became disabled, in the tax year for which the estimated payment was due or in the preceding tax year and the underpayment was due to reasonable cause and not to willful neglect. Otherwise, the penalty is mandatory where there is an underpayment.
SAMPLE OF AN ESTIMATED TAX WORKSHEET:
1. Enter amount of adjusted gross income(1): _______________
2. Enter itemized deductions OR Standard deduction: _______________
3. Subtract 1 from 2: _______________
4. Exemptions: Multiply Ex. Amount by number of Exemptions: _______________
5. Subtract 4 from 3: _______________
6. Tax, figure using tax rate schedule: _______________
7. Additional taxes: Lump sum distributions, etc: _______________
8. Add lines 6 & 7: _______________
9. Credits (Not Withholding): _______________
10. Subtract 9 from 8, enter result but not less than zero: _______________
11. Self-employment tax, usually from Schedule C: _______________
12. Other Taxes: _______________
13a. Add lines 10 through 12: _______________
b. Earned income credit from form 4136: _______________
c. Subtract line 13b from line 13a. This is your total estimated tax: _______________
14a. Multiply line 13c by 90%: _______________
b. Enter the tax shown on prior yr tax return: _______________
c. Enter the smaller of line 14a or 14b. _______________
THIS IS YOUR REQUIRED ANNUAL PAYMENT _______________
TO AVOID A PENALTY:
15. Income tax withheld & estimated to be withheld: _______________
16. Subtract line 15 from 14c. _______________
Note: If zero or less, or line 13c minus line 15 is less than stop here. You are not required to make estimated tax payments:
Partnerships: Partnerships do not pay tax. Instead, the income or loss is reported by the partners on their individual returns. As indicated above under the definition of gross income, an individual would include their partnership income in computing estimated tax liabilities.
S-Corporations: S-corporations are also pass-through entities, much the same as partnerships. In general they do not pay tax, so no estimated tax is required. There are extreme circumstances where a S-corporation would be taxed. If the S-corporation was incorporated after 1982, immediately became an S corporation and has no earnings or profits, code section 1374 comes into play with a tax on certain capital gains. In most of our cases, this would not be applicable.
C-Corporations: Corporations are a separate, taxable entity and as such are required to make estimated tax payments. If the corporation anticipates a tax bill of $500 or more, it must estimate it’s income tax liability for the current year and pay four quarterly estimated tax payments. The payment is made with form 8109. For calendar-year corporations, estimated tax installments are due on April 15, June 15, September 15, and December 15. Installments of fiscal-year corporations are due on the 15th day of the fourth, sixth, ninth, and twelfth months of the tax year. If any due date falls on a Saturday, Sunday or legal holiday, the payment is due on the first following business day.
If there is an underpayment, form 2220 should be attached to the return to show whether the addition to tax applies and, if so, the amount of the penalty.
To avoid a penalty, each installment must equal at least 25% of the lesser of (1) 100% of the tax shown on the current year’s tax return (or of the actual tax if no return is filed) or (2) 100% of the tax shown on the corporation’s return for the preceding tax year, provided a positive tax liability was shown and the preceding tax year consisted of 12 months.
 The more common types of “gross income” are: 1. Compensation for services, including fees, commissions, fringe benefits, and similar items; 2. Gross income from business; 3. Gains from dealings in property; 4. Interest; 5. Rents; 6. Royalties; 7. Dividends; 8. Alimony and separate maintenance payments; 9. annuities; 10. Income from life insurance and endowment contracts; 11. Pensions; 12. Income from discharge of debt; 13. Partner’s share of partnership income; 14. In “in respect of a decedent”; and 15. Income from an interest in an estate or trust.
For more information contact: Traders Accounting