Estimated Taxes: Calculating How Much Estimated Tax to Pay

Paying estimated taxes is one way for individuals to submit payments for their taxes to the federal government. Generally, people who run their own business, landlords, investors, and other people may need to pay in estimated taxes if their paycheck withholding won't cover all the taxes that are due. The other payment option is to pay in through withholding. Taxpayers might want to consider adjusting their withholding instead of paying estimated taxes.

The Estimated Tax Penalty

You need to pay in at least enough tax through a combination of withholding and estimated payments to avoid the estimated tax penalty. To avoid the penalty, you will need to pay in "at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller," according to the IRS. The penalty is basically the IRS's way of charging you interest for not paying your taxes throughout the year. The current interest rate for underpayments by individuals is 4%. (The IRS sets this rate each quarter.)

Figuring out how much to pay in estimated taxes

The easiest method for calculating your estimated payments is to divide last year's unfunded tax liability in four, and then make estimated payments using this figure. To do this, look on last year's tax return and find your total tax liability . Then subtract any withholding you expect to pay in for this year. If your withholding will be about the same as last year, you could subtract last year's withholding amount. The difference is the amount of tax that needs to be paid in through estimated taxes to avoid a penalty. This method, while quick and easy to calculate, does not take into account changes in your income for this year. You might have more income, or more losses, or qualify for different tax deductions. The alternate method that I use personally and with my clients is to run a tax calculation based on this year's income.

What I do is run a report showing income and deductions for the year using a financial software program such as Quicken, Microsoft Money, Quickbooks or Peachtree. These programs can generate a report showing your income and deductions for the year-to-date (or any other time period you want to measure). I then export the figures into a spreadsheet program for further number crunching. Be sure to multiply these year-to-date amounts to cover the entire year. To make the math easier, you may want to run the report based on, the first half of the year, for example, and then you could multiply by two to get a projected full year figures.

Using these annualized income and deduction figures, you will calculate your projected tax liability. You will need to know the current year's tax rates. And you would subtract any withholding or tax credits you will be eligible for in order to find out exactly how much needs to be paid in through estimated tax payments.

Estimated tax payments are due quarterly. Here's a list of the payment due dates:

Estimated Tax Deadlines

Estimated tax payments are due quarterly on the following days:

• April 15th,
• June 15th,
• September 15th, and
• January 15th.

Some taxpayers pay more frequently than this. Some people have set up the monthly payments by EFTPS so that a fixed amount of tax is paid as part of their monthly budget. And if you skip a payment, you may want to adjust your subsequent estimated payment to cover the shortfall.

The Tax Cuts of 2010 - Good News for Businesses

Do you own a business? Are you wondering how your company is affected by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 - aka the Obama Tax Cuts?

If so, read on. We explain how your business can benefit from the new tax cuts. We also tell you about your responsibility to enact the payroll tax cut for your employees.

Paying Less Tax Under the New Legislation

The Bonus Depreciation Doubled in Size

Under the Obama Tax Cuts, the bonus depreciation amount jumped from 50% to 100%. This means businesses can write off 100% of eligible purchases (e.g., equipment and off-the-shelf computer software) bought and put in service between September 9, 2010 and December 31, 2011.

Note: In 2012, business owners can still take a bonus depreciation, but it will be back at the 50% level.

Section 179 Deductions Also Got a Boost

Section 179 deductions allow businesses to deduct the full purchase price of property from their gross income.

Section 179 deductions differ from standard depreciations because they allow you to write off your expenses in the same year you bought property, rather than spreading it out over time.

Section 179 was bolstered under the Small Business Jobs Act of 2010 (signed September 27, 2010), with the allowable deduction set at $500,000 for 2010 and 2011. Now, under the Obama Tax Cuts, the maximum deduction will fall only to $125,000 in 2012, rather than to $25,000, as it would have without the recent tax cut package.

This should inject confidence in the business owner that she can continue to invest in her business for the next few years - which is beneficial not just for her, but for the U.S. economy as a whole.

Caution: Estates and trusts cannot take a section 179 deduction.

Section 179 Vs. Bonus Depreciations - Which Is Better?

Section 179 deductions are available on all new and used equipment, whereas the bonus depreciation (set now at 100%, with no limit) is for new equipment only.

Think of the bonus depreciation as an extra deduction you can take - but you must take it in the first year only.

To figure out which type of deduction is right for your business for tax year 2010, give us a call.

Complying with the New Payroll Tax Cut

The Obama Tax Cuts instituted a one-year reduction in the Social Security tax for employees, from 6.2% to 4.2%. This means the single taxpayer making $50,000 will save $1,000 on taxes in 2011.

Note: This reduction in Social Security tax will not impact the employee's future Social Security benefits.

But it's up to business owners to adjust their employees' withholdings. They must do so as soon as possible in January 2011, but no later than January 31, 2011. Notice 136 lists the new amounts you should withhold from employees' paychecks.

Caution: If you withhold too much Social Security tax during January, you will need to make an offsetting adjustment in your employees' pay as soon as possible and no later than March 31, 2011. Ask us for more details.

Self-Employed Folks See a Reduction, Too. Those who own businesses with no other employees should also be aware of their new Social Security withholding amount, which fell from 12.4% to 10.4%. This combined with the 2.9% Medicare rate brings the total of the 2011 self-employment tax rate to 13.3%.

Confused? We're Here to Help

The Obama Tax Cuts are designed to bolster the economy by putting more money back in the pockets of business owners, thus allowing them up to hire more workers.

But to take advantage of the new rules for deductions and depreciations, you have to understand the new law.

That's where we come in. To find out more about how to improve your business with certain investments now and in 2012, please contact us. 

colorsconsulting@gmail.com

Stop Doing Shoebox Bookkeeping and Start Taking Charge of Your Financial Records

Some small business owners have the mistaken belief that as long as they have all their paperwork together in one box that they’re doing a good job with their finances.  Nothing could be further from the truth.  In bookkeeping circles this is known as “shoebox bookkeeping” and many times it’s a bookkeepers worst nightmare at year end.

Bookkeepers generally charge by the hour so the additional time it takes them to sort and categorize your paperwork will end up costing you more than if you’d spent a little time organizing your paperwork.

Also when a bookkeeper only looks at your paperwork once a year it can be difficult to answer questions about specific expenses when so much time has passed by.  This may mean missing out on an important business expense because you can’t give an adequate explanation for it.

Not only that, but most businesses typically must submit remittances to the government either monthly or quarterly.  If your information is kept in a box, this makes getting reports in on time that much more difficult.

Furthermore, business owners who use shoebox bookkeeping have no idea how they’re doing financially throughout the fiscal year.  They can’t tell if they’re spending too much or bringing in enough revenue to make a profit.  They tend to judge their finances by the balance in their bank account, which doesn’t take into account monies owed by them or to them.

So if you are a small business owner who is using a shoebox bookkeeping system, you really need to consider whether this is saving you money or whether it’s time to find yourself a freelance bookkeeper.

Claiming Dependents

Being able to claim a dependent on a tax return is tied to a number of related tax benefits. Taxpayers who claim dependents can claim an additional personal exemption for each dependent. Also, taxpayers may be eligible to claim the child tax credit, the child and dependent care tax credit, and the earned income tax credit. Unmarried taxpayers who support a dependent may be eligible to file as head of household.

With all these tax benefits tied to claiming a dependent, it is important to make sure that you really can claim the dependent on your tax return.

Basically, you can claim a dependent if the person meets one of two criteria:

• qualifying child or
• qualifying relative.

And here, briefly, are some guidelines to help you out. First, the qualifying child rules always take precedence over the qualifying relative rules. So if someone can claim a dependent using the qualifying child rules, then no one else can claim the same dependent using the qualifying relative rules.

Secondly, both sets of rules are designed to award the dependent to one and only taxpayer. For example, under the qualifying child rules, the child must live with you for more than half the year. Under the qualifying relative rules, the taxpayer must provide more than half of the dependent's total support. While a bit complicated, these rules are designed to eliminate confusion over who gets to claim the dependent.

Thirdly, the IRS will always audit tax returns where two or more taxpayers attempt to claim the same dependent. Only one taxpayer will win. The taxpayer who loses might also lose the related tax breaks such as child tax credit, earned income credit, or Head of Household filing status. What that means, is that the taxpayer who loses the IRS audit will have to pay additional taxes, plus penalties and interest. That makes dependent audits one of the most expensive audits that a taxpayer can endure.

To protect yourself, you should make sure that you are eligible to claim the dependents. Separated parents should also review the rules for sharing the tax benefits of a dependent. You should gather any documents that would support your claim. It would also be advisable to get a written agreement with an ex-spouse detailing who gets to claim the dependents and for which years.

Colors Consulting Group can help!!!

Affordable Accounting and Bookkeeping Service |

Does the IRS Owe You Money?

• The Internal Revenue Service may have money for you. Was your income below the limit that requires you to file a tax return? If so, you may still be due a refund.
  If you have not filed a prior year tax return and are due a refund, you should consider filing the return to claim that refund. If you are missing a refund for a previously filed tax return, you should contact the IRS to check the status of your refund and confirm your current address.
  Unclaimed Refunds
  Some people may have had taxes withheld from their wages but were not required to file a tax return because they had too little income. Others may not have had any tax withheld but would be eligible for the refundable Earned Income Tax Credit.
  To collect this money a return must be filed with the IRS no later than three years from the due date of the return.
  If no return is filed to claim the refund within three years, the money becomes the property of the U.S. Treasury.
  There is no penalty assessed by the IRS for filing a late return qualifying for a refund.
  Current and prior year tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling      800-TAX-FORM     
  Information about the Earned Income Tax Credit and how to claim it is also available on IRS.gov.
  Undeliverable Refunds
  Were you expecting a refund check but didn't get it?
  Refund checks are mailed to your last known address. Checks are returned to the IRS if you move without notifying the IRS or the U.S. Postal Service.
  You may be able to update your address with the IRS on the “Where’s My Refund?” feature available on IRS.gov. You will be prompted to provide an updated address if there is an undeliverable check outstanding within the last 12 months.
  You can also ensure the IRS has your correct address by filing Form 8822, Change of Address, which is available on IRS.gov or can be ordered by calling
                800-TAX-FORM
  If you do not have access to the Internet and think you may be missing a refund, you should first check your records or contact your tax preparer. If your refund information appears correct, call the IRS toll-free assistance line at 800-829-1040  to check the status of your refund and confirm your address.    

The Internal Revenue Service has kicked off the 2011 Tax Season

The Internal Revenue Service has kicked off the 2011 Tax Season with several announcements that impact taxpayers. First of all, taxpayers have until Monday, April 18th, to file their 2010 tax returns and pay any due tax. This is because Emancipation Day, a holiday observed in the District of Columbia, falls on April 15th this year. By law, District of Columbia holidays impact tax deadlines in the same way Federal holidays do, giving all taxpayers three extra days to file this year.

    For most taxpayers, the tax filing season will start on schedule. However, the tax law passed by Congress and signed by President Obama in December means some taxpayers will need to wait until mid to late February to file their returns in order to give the IRS time to reprogram its computers for the changes. Those who need to wait to file include taxpayers claiming itemized deductions on Schedule A, taxpayers claiming the higher education tuition and fees deduction and taxpayers claiming the educator expense deduction. In the meantime, affected taxpayers should not submit their 2010 tax returns until the IRS announces a specific date when it can start processing returns impacted by the recent law changes. This includes both electronic filers and paper filers. The IRS will start accepting simple e-filed returns on January 14th.

    The National Taxpayer Advocate, in her Annual Report to Congress on January 5th, noted that individual taxpayers find tax preparation so overwhelming that about 60 percent now pay preparers to do it for them and another 29 percent use software packages to do their returns.

    The IRS still holds taxpayers responsible for the  accuracy of their returns, even if they use a paid preparer. Accordingly, it is very important to provide complete and accurate information to the preparer. The required information includes the name, social security number and address of the taxpayer, the spouse and any dependents included on the return. For someone using a preparer for the first time, a copy of the previous year’s return is essential, but three years of prior returns is preferred. In addition, copies of continuing schedules such as depreciation schedules, net operating loss and/or tax credit carryovers and tax basis of ownership interests in Partnerships and SubChapter “S” corporations are necessary.

    The following documentation is necessary for the preparation of the current year return:

• All year end tax documents received by the taxpayer, including W-2s(wages), 1099-INT(interest), 1099-DIV(dividends), SSA-1099(social security benefits), 1099-B(proceeds from broker and/or barter transactions, 1099-R(pension and IRA distributions), 1099-MISC(other miscellaneous income, 1099-S(Proceeds from Real Estate Transactions), Schedules K-1 from Partnerships, S corporations, estates and trusts and all other income reporting statements, including all copies provided from the payer of the income.

• Copies of Real Estate Tax Statements, Mortgage interest payments(Form 1098), Motor Vehicle license tab receipts, Acknowledgment Statements from Charities for charitable contribution deductions, Certificates of Rent Paid(for renters claiming a MN Rent Credit).

• Copy of the closing statement if you bought or sold real estate.

• Detail of estimated tax payments made during the year, if any.

• List of itemized deductions categorized on a separate sheet for medical, taxes, interest, charitable contributions and other miscellaneous deductions.

• Mileage figures for any automobile expense claimed, including total mileage, commuting mileage, medical mileage, charitable mileage and business mileage by vehicle.

• Income and deductions categorized on a separate sheet for business and rental activities.

    In addition, most preparers have a questionnaire to be completed which will indicate if other items need to be addressed in the preparation of your return.

Keeping Good Records Reduces Stress at Tax Time

Keeping Good Records Reduces Stress at Tax Time

You may not be thinking about your tax return right now, but now is a great time to start planning for next year and to make sure your records are organized. Maintaining good records now can make filing your return a lot easier and it will help you remember transactions you made during the year.

Here are a few things the IRS wants you to know about recordkeeping.

Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you receive an IRS notice. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.

Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:

• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return

You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:

• A home purchase or improvement
• Stocks and other investments
• Individual Retirement Arrangement transactions
• Rental property records

If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:

• Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
• Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
• Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
• Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks