Our federal taxing system is a “pay as you go” system. Your taxes are paid to the government in two ways: withholding through your employer or submitting quarterly estimated taxes.
Withholding is the method used for those who are paid as an employee or who might receive pension payments, social security, and bonuses, to name a few. You typically elect how much you want to be withheld by completing a Form W4 for federal and Form G4 for the state. No matter how your withholding is taken from your salary during the year, it is viewed as being paid in evenly.
Quarterly estimated payments is the method used by people who do not work as employees but are self-employed or for individuals who receive dividends, interest, capital gains, rents or royalties and have no option to withhold. Many retired taxpayers submit quarterly estimated payments.
Estimated payments must be made timely. The deadlines are April 15, June 15, September 15 and January 15. At Henssler Financial, we often recommend taxpayers submit their fourth quarter state payment during December rather than waiting until the January 15th deadline. By doing this, taxpayers are then able to deduct the fourth quarter state tax payment in the year it was paid, rather than waiting until the next year.
Quarterly estimated payments for federal tax need to include the federal taxes, as well as the self-employment taxes. Congress extended the 2% FICA reduction through December with it scheduled to end January 1, 2013. For 2012, you must submit 13.3% in employment taxes on the first $110,100 and 2.9% on anything above that amount. Beginning January 1st employment taxes are scheduled to increase to from 13.5% to 15.3%, while the amount above $110,100 remains the same at 2.9%.
How Much Do You Need to Estimate or Withhold?
To avoid federal interest and penalties you must withhold, or make estimated payments ratably, to meet 100/110% of your prior year total tax, or 90% of the actual or current year tax due, whichever is less. The 100% of prior year tax is for those taxpayers whose AGI was less than $150,000 married filing jointly or $75,000 for single filers. If your income is more than $150,000, you must meet 110% of your prior year tax liability. Most states conform to these guidelines; however, Georgia currently has a 70% threshold for current year tax due.
If you had a zero tax liability for the prior year, you do not have to make estimated tax payments. You can wait to pay your taxes when you file your personal return. You can elect to be exempt from withholding if for the prior tax year you had no tax liability and for the current year you expect to have no tax liability.
Communicate with Your Tax Consultant – Don’t wait until Year end!
It is important to have your tax consultant review your tax situation quarterly, or at the very least, midyear to see if you are on track to meet your “safety” tax payments. If you have met your safety payments by September, you may want to discontinue any further withholding or estimated payments and pay your residual taxes when you file your return in April. This allows you the luxury of holding onto your tax dollars and even investing them until your tax returns are due.
However, various events can cause you to owe additional taxes. Some examples are: selling a piece of property for a gain, marketable securities sold at a gain or receiving an inheritance. If any of these scenarios occur, you need to determine the additional taxes you owe and either increase your withholding for the remainder of the year or make a tax estimate for the quarter in which you incurred the gain. If you make the tax payment in the wrong quarter, you may be subject to penalties. If you have the ability to increase withholding in lieu of making tax estimates, this might be a better and safer way to pay in your tax liability, as withholding is viewed as being paid in evenly throughout the year—even if it is all withheld from the very last paycheck of the year.
At Henssler Financial we believe you should Live Ready, which includes making sure you are paying your tax liability throughout the year so that you do not incur penalties for late or underpayments. If you have questions regarding your withholding or estimated payments, the tax experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or e-mail at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
