Keep Up With Your Estimated Quarterly Taxes…Or Else!
Uncle Sam can be reasonable and at times even generous when it comes to its tax rules for traders. However on one issue it is infamously inflexible: estimated quarterly taxes. These are the required installment payments you make toward your estimated tax liability.
Underpay on your estimated quarterlies, or fail to pay altogether, and you'll likely receive a penalty for your neglect. That's because the Internal Revenue Service would lose countless millions in potential revenues if it allowed those tax dollars to remain in taxpayer accounts all year, earning interest for you rather than the government.
If your tax due will exceed $1,000, the Internal Revenue Service requires you to make quarterly payments on Form 1040-ES (Estimated Tax for Individuals). Payments are due as follows: First installment: April 15. Second installment: June 15. Third installment: September 15. Fourth installment: January 15.
As a general rule, the payments you make quarterly must add up to at least 90% of your final income tax liability to avoid a penalty. But if you overpay, even if you wildly overpay, don't expect any interest refund; the IRS taketh, but it never giveth away.
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Staying Ahead on ES
Because trading income can be extremely erratic, it's important to know the rules where your estimated quarterly payments are concerned. Here's how the IRS guidelines break down based on your income:
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If your income requires that you make estimated taxes after March 31 but before June 1, you should pay 50% of your estimated tax by June 15 and 25% payments on September 15 and January 15.
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If your income requires that you make estimated payments after May 31 but before September 1, you should pay 75% of your estimated tax on or before September 15 and 25% on January 15.
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If your income requires you to make estimated payments after August 31, you should pay 100% of your estimated tax by January 15.
As a trader, you face a difficult dance as your earnings ebb and flow: you want to keep as much money as possible in your brokerage account, satisfy the IRS' quarterly payment requirements, and have sufficient funds available to pay the balance of your tax bill.
Traders Accounting's interactive CD-ROM, "Estimated Taxes for Traders and Real Estate
Investors," takes the guess work out of quarterly estimates. With the help of 10 easy-to-use interactive spreadsheets, you can quickly calculate how much tax to pay on your profits each quarter. Why pay more than necessary? Our Estimated Taxes CD is a key tool to maximize your liquidity. Click
here for more information.
Who Pays Estimated Taxes?
Estimated taxes apply to all U.S. citizens, residents and non-resident aliens who expect to owe in excess of $1,000 on their upcoming federal income taxes. The exception is anyone who did not file a tax return last year, or did not incur any tax liability in the last tax year, provided that the year encompassed a 12-month period.
ES payments also apply to C-Corporations. The rules for corporate estimated quarterly payments are the same as for individuals, with these exceptions:
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Corporations make payments with Form 8109 (Estimated Taxes - Corporations Only and 8109) instead of 1040-ES;
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Fiscal-year corporation payments are due on the 15th day of the fourth, sixth, ninth and 12th months of their tax year, and;
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If any due date falls on a Saturday, Sunday or legal holiday, payment is due the next business day.
If a corporation underpays, it should attach Form 2220 (Underpayment of Estimated Tax by Corporations) to its return to show whether the addition to tax applies and, if so, the amount of the penalty. To avoid penalties, each payment must equal at least 25% of the lesser of 100% of the tax shown on the current year's return or 100% of the tax shown on the preceding year's return, provided the latter showed a positive tax liability and the preceding tax year consisted of 12 months.
"Flow-through" business entities such as a limited liability company, limited or general partnership or S-Corporation do not pay estimated quarterly tax; this obligation flows through for the individual shareholders or partners to include in calculating their individual estimated tax liability.
Reprieve for Underpayment
The IRS is authorized to waive the mandatory penalty for underpayment if the underpayment was due to casualty, disaster or other unusual circumstances and the imposition of the penalty would run contrary to equity and good conscience. It may also waive the penalty for an individual who retired having attained age 62, or who became disabled, either during the current or previous tax year. A key test is whether the underpayment was due to a reasonable cause and not to willful neglect.
To petition for dispensation, you must file Form 2210 (Underpayment of Estimated Tax by Individuals, Estates and Trusts).
Our Traders Accounting tax professionals can help you get your tax year and estimated quarterly payments off on the right foot.
Contact
us today to learn more about how effective tax planning can save you time and money.
Jim Forrester, CPA is the Tax
Director of Traders Accounting, the nation's leading provider of tax
consulting, entity formation, tax preparation and 401(k) services to
the trading industry. Traders Accounting teaches traders how to
properly set-up their trading business and take advantage of all the
money-saving tax strategies available to home-based businesses.
Explore the website that Forbes has declared "Best of the Web" for
six straight years and find out exactly how to make your trading
into a 'business' and receive tax breaks and tax deductions worth up
to $25,000 each year. Visit www.tradersaccounting.com for more info.
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