The Intuit TurboTax guide to avoiding estimated tax penalties

The article below is up to date based on the latest tax laws. It is accurate for your 2017 taxes, which you will file by the April 2018 deadline. Learn more about tax reform here.

If you’re self-employed, estimated taxes are a part of your business life. This means you may need to send quarterly estimated taxes four times a year (in April, June, September, and January) since the United States works off the principle of “pay as you go”, and self-employed don’t have taxes taken out of every paycheck. Employees have their taxes withheld by their employer, so they never have to think about it, but if you’re self-employed you have to pay taxes yourself.

If you’ve never understood how quarterly estimated tax payments work, how quarterly estimated tax penalties are calculated or determined, or how to best meet these obligations, here are some tips for you to help avoid estimated tax penalties.

Avoiding Underpayment Penalties

There are ways to avoid a penalty even if you underpay your obligation. The government knows you can’t predict the future with absolute certainty, especially when you’re self-employed, so they give you some leeway.

RELATED: Big ticket items customers will buy at Walmart using their tax return

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Big ticket items customers will buy at Walmart using their tax return
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Big ticket items customers will buy at Walmart using their tax return

Alabama

Top selling item: iPhone

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Alaska

Top selling item: Dell Computer

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Arizona

Top selling item: PlayStation Console

Photo credit: Getty

Arkansas

Top selling item: Xbox Console

Photo credit: Getty

California

Top selling item: Xbox Console

Photo credit: Getty

Colorado

Top selling item: Samsung 55" Smart LED HDTV

Photo credit: Getty

Connecticut

Top selling item: Vizio 55" Smart LED HDTV

Photo credit: Getty

Delaware

Top selling item: Nintendo Console

Photo credit: Getty

Florida

Top selling item: Nintendo Console

Photo credit: Getty

Georgia

Top selling item: Nintendo Console

Photo credit: Getty

Hawaii

Top selling item: Vizio 60" 4K Smart LED HDTV

Photo credit: Getty

Idaho

Top selling item: PlayStation Console

Photo credit: Getty

Illinois

Top selling item: Proscan 50" LED HDTV

Photo credit: Getty

Indiana

Top selling item: iPhone

Photo credit: Getty

Iowa

Top selling item: Convertible crib

Photo credit: Getty

Kansas

Top selling item: Sceptre 50" LED HDTV

Photo credit: Getty

Kentucky

Top selling item: Nintendo Console

Photo credit: Getty

Louisiana

Top selling item: iPhone

Photo credit: Getty

Maine

Top selling item: iPhone

Photo credit: Getty

Maryland

Top selling item: Proscan 50" LED HDTV

Photo credit: Getty

Massachusetts

Top selling item: Nintendo Console

Photo credit: Getty

Michigan

Top selling item: Proscan 50" LEC HDTV 

Photo credit: Getty

Minnesota

Top selling item: Nintendo Console

Photo credit: Getty

Mississippi

Top selling item: iPhone 

Photo credit: Getty

Missouri

Top selling item: Xbox Chronicle 

Photo credit: Getty

Montana

Top selling item: Nintendo Console

Photo credit: Getty

Nebraska

Top selling item: iPad Pro

Photo credit: Getty

Nevada

Top selling item: PlayStation Console

Photo credit: Getty

New Hampshire

Top selling item: iPhone

Photo credit: Getty

New Jersey

Top selling item: Spalding Basketball Hoop

Photo credit: Getty

New Mexico

Top selling item: Vizio 65" Smart LED HDTV

Photo credit: Getty

New York

Top selling item: Nintendo Console

Photo credit: Getty

North Carolina

Top selling item: Nintendo Console

Photo credit: Getty

North Dakota

Top selling item: Drone with camera

Photo credit: Getty

Ohio

Top selling item: Nintendo Console

Photo credit: Getty

Oklahoma

Top selling item: Proscan 50" LED HDTV

Photo credit: Getty

Oregon

Top selling item: Nintendo Console

Photo credit: Getty

Pennsylvania

Photo credit: iPhone

Photo credit: Getty

Rhode Island

Top selling item: Vizio 70" 4K Smart LED HDTV

Photo credit: Getty

South Carolina

Top selling item: iPhone

Photo credit: Getty

South Dakota

Top selling item: iPhone

Photo credit: Getty

Tennessee

Top selling item: iPhone

Photo credit: Getty

Texas

Top selling item: Nintendo Console

Photo credit: Getty

Utah

Top selling item: PlayStation Console

Photo credit: Getty

Vermont

Top selling item: iPhone

Photo credit: Getty

Virginia

Top selling item: iPhone

Photo credit: Getty

Washington

Top selling item: Playstation Console

Photo credit: Getty

West Virginia

Top selling item: Nintendo Console

Photo credit: Getty

Wisconsin

Photo credit: Proscan 50" LED HDTV

Photo credit: Getty

Wyoming

Top selling item: iPhone

Photo credit: Getty

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Generally, if you owe less than $1,000, you do not have to pay quarterly estimated tax payments and will not see an estimated tax penalty. If you pay at least 90% of your tax obligation or 100% of the tax owed in the prior year (whichever is smaller), then you will not be penalized. If you are a high-income taxpayer, with an AGI over $150,000, then the 100% is increased to 110%.

Finally, if none of those are true, you can request a waiver of the penalty under two conditions:

• You failed to make a required payment because of a “casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty”, or


• “You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.”


You may also be able to avoid estimated tax penalties if you can use the annualized installment method at tax-time to reflect your fluctuating income and avoid estimated tax penalties. If you’re like most self-employed business owners, you may see slow months and then big boosts in others. However, if you do not receive income evenly throughout the year, your required estimated tax payment for one or more periods may be less than the amount figured using the regular installment method.

The annualized method determines your estimated tax liability as your income accumulates throughout the year instead of dividing your entire year’s estimated tax liability by four as if your income was earned evenly. So, if your income is concentrated, for example, in the fourth quarter of the year you may be able to annualize your income. TurboTax Self-Employed guides you through the annualized installment method at tax-time.

How to Make the Correct Estimated Payments

If your business is growing, the simplest way is to take your tax obligation from last year and make four equal payments that total slightly more than that amount. If you are a high-income taxpayer, make that four equal payments that total slightly more than 110%.

Otherwise, keep track of your income and expenses so that you can calculate actual taxes due each quarter. QuickBooks Self-Employed can easily calculate your quarterly estimated taxes since you can track your business income, expenses, and tax-deductible mileage year round.

If you underpay your estimated taxes but escape penalty, you can still pay the difference in April when you file your tax return.

Don’t worry about knowing these tax laws. TurboTax will ask you simple questions about you and your business and give you the tax deductions and credits you’re eligible for based on your answers. And if you still have questions you can connect live via one-way video to our expansive network of tax experts who are CPAs and Enrolled Agents with TurboTax Live to get your tax questions answered and have your tax return reviewed to help you file.

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