For most taxpayers, during October, tax season is a distant thought. Although, Quarter 4 is a great time for taxpayers to review their withholding and estimated tax payments and avoid surprises on their tax bills. It is important to be sure that enough money is being withheld from your paychecks and/or being paid in estimated tax. Penalties are a risk if a taxpayer does not pay, or underpays, on their estimated taxes. Reviewing your estimated tax payments and withholdings before the end of each quarter will ensure you are not underpaying, and that you avoid tax penalties. The result will be a satisfactory tax return at the end of tax season.
Adjust Tax Withholdings
Withholdings are federal income taxes that are withheld from an employee’s paycheck. Employers will usually withhold the estimated amount of federal income tax due from each paycheck, and send it to the IRS on the employee’s behalf.
The amount of income tax an employer will withhold from an employee’s paycheck is dependent on two things: the amount the employee earns during the pay period and the information given to the employer on their Form W-4.
The Information an employee provides on their W-4 includes personal information and marital status, what jobs they work, if they have any dependents, and how much income they make. All of this information is taken into account when determining how much employers should withhold in federal taxes.
Employees should review their tax withholdings throughout the year, and if needed, submit a new W-4 form to their employer when any of their personal information or income changes. There is also an online Tax Withholding Estimator tool on the IRS website that can help employees determine if their current withholdings are substantial.
Making Estimated Payments
In some circumstances, taxpayers may need to make quarterly estimated tax payments on their own, separate from employer-withheld payments. Here are some situations where this might be necessary:
- If their employer is not withholding enough income tax from their paycheck.
- If the amount being withheld from a taxpayer’s pension is not enough.
- If a taxpayer is self-employed.
- If they receive any other income aside from their employment such as interest, dividends, alimony, capital gains, gifts, awards, and prizes.
If you fall into one of these categories, make sure you are making the necessary estimated payments each quarter to avoid tax penalties. Estimated tax payments are due quarterly and can be made online to the IRS.
Each quarter, be sure to review your current financial income state and determine if you need to make adjustments to your payments. Doing so will save you frustration at the end of the year. If your income does increase, you have a few options. You can increase your withholding amount by updating your W-4 form or you can make additional estimated payments on your own. Any underpayments to the IRS may result in interest charged on top of the amount owed.