Estimated Taxes
Revised By: Whitney Ibarra
The Henssler Financial Group Position Paper

The law requires that a certain level of tax be paid during the tax year. This can be accomplished through withholding of federal and state tax (in certain circumstances) on wages, pensions or Social Security benefits. If this does not meet your obligation, you should make quarterly estimated payments. Making quarterly estimated payments will help you avoid owing a large tax amount in April and possible penalties and interest for not meeting your obligation.

How Much Tax Must You Pay During The Year?

If your total tax obligation for the year will be less than $1,000, it is not necessary to withhold or make estimated payments. You may pay your taxes by the following April without penalty.

If your total tax obligation will be greater than $1,000, at least 90% of an individual's final total tax (income, self-employment, as well as other taxes reported on Form 1040 — computed by the following April 15th) must be paid through either withholding or estimated tax payments to avoid underpayment penalties and interest.

For example, if your federal tax bill is $15,000, you must have $13,500 paid in by December 31st through withholding or with quarterly estimated payments with your final quarter due January 15, 2008. The balance of the tax, $1,500, would be due by April 15, 2008.

Safe Harbor Rules

Many individuals cannot adequately compute their entire tax obligation during the year to meet the 90% threshold described above. In order to avoid penalties and interest for underpayment of tax, the IRS provides safe harbor rules that you can meet instead of paying the 90% threshold.

How to Make Quarterly Estimated Payments

In general, you are to make four equal installment payments based on your calculations. The first payment for the current tax year is due April 15th, the second June 16th, the third September 15th, and the fourth installment is due January 15th of next year.

If you have no means to have tax withheld (i.e., from wages) and your projected tax bill will be $10,000 (or your last year's tax is $10,000), you should make four installment payments of $2,500 each.

If you do withhold taxes through your wages or pension, but it is not at a high enough rate and you do not wish to adjust your withholding, you should make up the projected difference through estimated payments. If your projected tax bill will be $10,000 and you withhold $500 per month ($6,000 per year), you should make quarterly estimated payments of $1,000 to make up the $4,000 shortfall.

Annualized Income Installment Method

This method is generally used by those whose prior year tax bill was much higher than they project for their current tax year. Under these circumstances, they may not wish to meet the safe harbor rules.

For example, if your 2007 tax obligation included a significant gain from the sale of a business or rental property, you cannot calculate your income for the whole year at this time. Another example would be someone who quit a job to start their own business and cannot anticipate the future income amounts. For this method, you calculate your actual income and deductions for certain periods of the year. The income already earned is then annualized, the tax calculated and a percentage paid for that installment.

For additional information, please contact the Tax & Accounting Division of The Henssler Financial Group at 770-428-4025.