Estimated Tax Payments.

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anthonybowles
anthonybowles Member Newcomer

Just joined today. But have this we are wondering about.

We received a letter earlier this year. The IRS wanted us to pay Estimate taxes, and we had to come up with a lot.

We are both on SS, and I get approx, $1,250 in retirement. I have a part time job working 14-24 hours a week. We pay what is owe on our tax return each year. Average pay check right now is around $340.

Why do they now said we have to do this, and we should have started in 2022. The lady we talked to, told us we should have known. It was our fault we didn't. We have never heard of anyone we know, needing to do it, either...

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  • noahkoller
    noahkoller Member Newcomer
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    The important thing is not that you pay what you owe, but that you have at least 90% of what you owe withheld by the end of your tax year, typically, December 31st. Also, if you withhold an amount equal to your total tax liability form the previous year, you will avoid the requirement to make estimated tax payments.

  • MatthewD
    MatthewD FreeTaxUSA Team
    edited October 2023
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    Hello Anthony,

    Thank you for this question. I am sure others wonder the same thing when they get a letter like that from the IRS. Keep in mind that letters from the IRS can be very generic, so that letter may have details that do not all apply to your tax situation. (it really is hard to say). For example, you may not need to file estimated taxes with Form 1040ES, but instead, you need to have additional federal tax withholdings paid from your Social Security Benefits.

    The IRS letter you got is likely notifying you of an underpayment penalty. In other words, you did not pay enough estimated taxes during the year. This penalty can hit you even if you pay in full at tax filing time. Remember this: The IRS is a pay as you go system. In other words, as you receive taxable income you should be paying taxes on it.

    Keep in mind that all payments you make during the year are "estimated" tax payments. Your total tax is calculated when you prepare your return and any taxes you had withheld are applied. The taxes may not be reported as an Estimated Tax on form 1040ES, but it is still an estimate.

    You can avoid the Underpayment Penalty if you do the following:

    1. Your tax return shows less than $1,000 of total tax or
    2. You paid at least 100% of what you owed in the prior year, or you paid at least 90% of what your total taxes will be.

    For more details from the IRS see this IRS page on the Underpayment of Estimated Taxes.

    I suggest you have some federal taxes withheld from your Social Security Benefits, pension or IRA. Or have a little more withheld from your W2. You can redo your W4 and answer the questions relating to other sources of income. That way your employer can withhold a little more.

    The strategy is to pay the least amount you can without paying the IRS too much. That way you either get a small refund or pay a small amount at tax filing time.

    For more information on estimated tax payments, you can read this Community article on paying estimated taxes.

  • anthonybowles
    anthonybowles Member Newcomer
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    Thanks

  • pyz01
    pyz01 Member Newcomer
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    Hello Anthony -- as others have said, it is important to do an estimated tax calculation ahead of time, so you do not get hit with surprises like these. Interestingly, if you do an estimated tax calculation and find that you will not owe more than $1,000, you do not have to pay estimated taxes. However, if you find that you will owe more than $1,000, you absolutely should pay the estimated taxes each quarter.

    The IRS expects you to pay 90% of your estimated taxes before the end of the year. Additionally, they expected them to be paid quarterly. When you were working, your employer deducted those taxes from your paycheck. So theoretically, you were paying taxes every quarter. Now that you are retired (or on SS), you have a couple of options if you expect to have to pay taxes. You can have SS take out a % per check, or you can pay through IRS Direct what you think your quarterly payment should be.

    Finally, before you start doing any of this -- it is best to do an estimated tax markup to see if you will owe at the end of the year. Since most retirees have little additional income, if they do owe any taxes, it is usually very small so estimated taxes are not necessary. Do a good estimate and find out where you stand. Hope this information is helpful.