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IRS: Make an estimated tax payment now to avoid a tax time surprise

IRS: Make an estimated tax payment now to avoid a tax time surprise

WASHINGTON — The Internal Revenue Service today advised employees, whose 2018 federal income tax withholding unexpectedly falls short of their tax liability for the year, that they can still avoid a tax-time surprise by making a quarterly estimated tax payment directly to the IRS. The deadline for making a payment for the fourth quarter of 2018 is Tuesday, Jan. 15, 2019.

Although the Tax Cuts and Jobs Act (TCJA), the tax reform law enacted last December, lowered tax rates for most people, it also nearly doubled the standard deduction and limited or discontinued many deductions, among other changes. Though most 2018 tax filers are still expected to get refunds, the number who owe tax, and in some cases a penalty, is likely to be larger than in recent years, and many of them are likely to be people who have always gotten refunds.

Taxpayers who itemized in the past who now choose to take advantage of the increased standard deduction, as well as two-wage-earner households, employees with nonwage sources of income and those with complex tax situations, are at most risk of having too little tax withheld from their pay. This is especially true if they didn’t update their withholding earlier this year.

In addition, various financial transactions, especially those occurring late in the year, can often have an unexpected tax impact. Examples include year-end and holiday bonuses, stock dividends, capital gain distributions from mutual funds and stocks, bonds, real estate or other property sold at a profit.

For anyone at risk for a tax-time surprise, making an estimated tax payment soon is the fastest and easiest solution. Form 1040-ES, available on IRS.gov, includes a useful worksheet for figuring the right amount to pay. This form also includes a quick rundown of key tax changes and the federal income tax rate schedules for 2018.

A companion publication, Publication 505, Tax Withholding and Estimated Tax, has additional details, including worksheets and examples, that can be especially helpful to those who have dividend or capital gain income, owe alternative minimum tax or self-employment tax, or have other special situations.

The fastest and easiest way to make an estimated tax payment is to do so electronically using IRS Direct Pay or the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). For information on other payment options, visit IRS.gov/payments. If paying by check, be sure to make the check payable to the “United States Treasury.”

Though it’s too early to file a 2018 return, it’s never too early to get ready for the tax-filing season ahead. Though a good idea any year, starting early is a particularly good idea this year, when most tax filers will face revised tax rates and an altered array of deductions and credits.

To help anyone wishing to sketch out their return early, the IRS has already posted the 2018 Form 1040 and its instructions. Many supplemental forms and schedules have also been posted and others are being added every day.

Two other useful resources are Publication 5307, Tax Reform: Basics for Individuals and Families, and Publication 5318, Tax Reform What’s New for Your Business. For other tips and resources, check out the Get Ready page on IRS.gov.

Tax bill this year? Check withholding soon, avoid another one next year

Tax bill this year? Check withholding soon, avoid another one next year

Taxpayers who owed additional tax when they filed their 2017 federal tax return earlier this year can avoid another unexpected tax bill next year by doing a “paycheck checkup” as soon as possible, according to the Internal Revenue Service.

The Tax Cuts and Jobs Act, the tax reform legislation passed in December, made major changes to the tax law, including increasing the standard deduction, removing personal exemptions, increasing the Child Tax Credit, limiting or discontinuing certain deductions and changing tax rates and brackets.

These far-reaching changes could have a big impact on the tax refund or balance due on the tax return people file next year. The IRS encourages every employee to do a “paycheck checkup” soon to ensure they have the correct amount of tax taken out of their pay.

Checking and adjusting withholding now can prevent an unexpected tax bill and penalties next year at tax time. The IRS Withholding Calculator and Publication 505, Tax Withholding and Estimated Tax, can help.

The IRS encourages taxpayers to be proactive:

Do a ‘paycheck checkup’ soon

  • The Withholding Calculator can help taxpayers apply the new law to their specific financial situation and make an informed decision whether to change their withholding this year.
  • Adjust their withholding as soon as possible for an even, consistent amount of withholding throughout the rest of the year.
  • Taxpayers with more complex situations may need to use Publication 505. The publication is more effective for employees who owe self-employment tax, the alternative minimum tax or tax on unearned income from dependents. It can also help those who receive non-wage income such as dividends, capital gains, rents and royalties. Publication 505 includes worksheets and examples to guide taxpayers through their particular situations.

Underpayment penalties

  • To avoid paying the estimated tax penalty, taxpayers should ensure they have enough tax withheld from their paychecks and appropriate estimated tax payments. Ordinarily, taxpayers can avoid this penalty by paying at least 90 percent of their tax during the year.
  • If taxpayers expect to owe at least $1,000 in tax after subtracting withholding and refundable credits, they should make estimated tax payments.

Using the Withholding Calculator or Publication 505

  • Taxpayers should have their completed 2017 tax return handy to help estimate the amount of income, deductions, adjustments and credits to enter. They’ll also need their most recent pay stubs to help compute their withholding to date this year. Results from these tools depend on the accuracy of information a taxpayer provides.
  • Employees can use the results from the Withholding Calculator or Publication 505 to help determine if they should complete a new Form W-4, Employee’s Withholding Allowance Certificate, and, if so, what information to include on the form.
  • The calculator may also be helpful to recipients of pension and annuity income. These recipients can change their withholding by filling out Form W-4P and giving it to their payer.
  • If a taxpayer’s personal circumstances change during the year, they should re-check their withholding.

Adjusting withholding

  • If an employee determines they should adjust their withholding, they should complete a new Form W-4 and submit it to their employer as soon as possible.
  • Some employers have an electronic method to update a Form W-4.
  • Taxpayers who change their 2018 withholding should recheck their withholding at the start of 2019. A mid-year withholding change in 2018 may have a different full-year impact in 2019, so if taxpayers don’t submit a new Form W-4 for 2019, their withholding might be higher or lower than intended.
  • If an employee has a change in personal circumstances that reduces the number of withholding allowances they can claim, they must submit a new Form W-4 within 10 days of the change.
  • The fewer withholding allowances an employee enters on the Form W-4, the higher their tax withholding will be. Entering “0” or “1” on line 5 of the Form W-4 means more tax will be withheld; entering a bigger number means less tax will be withheld.

Additional information

  • The Withholding Calculator does not request personally identifiable information such as name, Social Security number, address or bank account numbers. The IRS does not save or record the information entered on the calculator. Taxpayers should be aware of tax scams, especially via email or phone and cybercriminals impersonating the IRS. The IRS does not send emails related to the calculator or the information entered in it.
  • The calculator and Publication 505 are not tax-planning tools. Taxpayers needing advice regarding the new tax law and personal situations should consult a trusted tax professional.

Taxpayers can get more information on these topics at www.irs.gov/withholding. For information on steps taxpayers can take now to get a jump on next year’s taxes, including how the new tax law may affect them, visit IRS.gov/getready.

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