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When you estimate tax payments,
the
IRS expects you to take your best shot
By Cora M. Barnhart •
Bankrate.com
Dec. 16, 1999 -- Be careful when
you estimate your tax payments -- or that refund you had counted
on as cash flow will flow right back as a late penalty to the IRS.
This tip clarifies this task by
explaining the methods the IRS allows taxpayers to use for this
process. It also helps you determine the best estimation method
to use for your particular tax situation.
As most small business owners know, the IRS
considers income taxes a "pay as you earn" proposition,
and demands quarterly payments. Here are the payment periods and
due dates for estimated tax payments:
- Payments from Jan. 1 through March 31 are
due April 15.
- Payments from April 1 through May 31 are
due June 15.
- Payments from June 1 through Aug. 31 are
due Sept. 15.
- Payments from Sept. 1 through Dec. 31 are
due Jan. 15 of the following year.
Two
ways to go
Now that 1999 is almost entirely in the books, you can use that
information to set your next batch of quarterly payments for the
year 2000.
The IRS provides two estimation methods for
calculating payments -- the Regular Installment Method and the Annualized
Income Installment method.
Taxpayers whose income stays relatively stable
over the course of the year should use the Regular Installment Method.
This method is straightforward. Since the IRS designates four payment
periods, you divide the total estimated tax payments on line 16
of the 1999 Estimated Tax Worksheet by four.
Some businesses, however, see their income rise
and fall, such as might happen to a dive shop owner whose business
spikes in the summer. These businesses may be able to pay via the
annualized income installment method, which allows payments to rise
and fall with income.
To find out whether your business can get away
with paying less in any of these periods, you need to complete the
1999 Estimated Tax Worksheet through line 16, then fill out a blank
1999 Annualized Estimated Tax Worksheet.
These forms will help you annualize your tax
at the end of each period based on a reasonable estimate of your
income, deductions and other items relating to events that occurred
since the beginning of the tax year through the end of the period.
Use the result you figure on line 26d to make your estimated tax
payments and complete your payment-vouchers.
Estimated
payments not always required
Small business owners who are holding onto their full-time jobs
while getting their startups off the ground may not have to pay
estimated taxes.
The trick is to make sure you have enough money
withheld from your regular paycheck to cover your business income.
The IRS will let you off the hook if this amount
is at least one-fourth of your required annual payment or at least
your required annualized income installment for that period. You
can also skip jumping through these hoops if you will pay enough
through withholding to keep the amount you owe with your return
under $1,000.
So if your income is starting to rise from your
business, but you want to avoid estimated payments as long as possible,
adjust your withholding upward.
Your company's personnel department or payroll
official should have the forms to help you change the amount.
-- Posted Dec. 16, 1999
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