Author Archives: SKJ CPA

Form 1040-ES: Estimated Tax for Individuals

1. How to Figure the Tax

 You are required to pay the smaller of 100% prior year’s tax or 90% of current year’s tax as estimated tax. If your Adjusted Gross Income is more than $75,000 (or $150,000 married filing jointly), the tax is 110% or 100%, respectively.

 IRS charges estimated tax penalty if the tax is not paid as above. The penalty is roughly 3-5% of unpaid balances.

2. Due Dates and How to Pay

Due dates of Form 1040-ES payments are April 15, June 15, September 15 and January 15 of the following year.

The estimated tax should be figured before April 15, the first payment due date. Thus, the estimated tax for the following year is figured when filing current year’s income tax return or extension. The estimated tax is reported on Form 1040-ES, the estimated tax payment voucher.  For instance, 2022 estimated tax is figured when filing 2021 income tax return (Form 1040) or extension (Form 4868).

The estimated tax can be paid by check using Form 1040-ES voucher. The tax can also be paid electronically using Electronic Fund Withdrawal or IRS Direct Pay.

3. Additional Information on Figuring Estimate Tax

If the estimated tax is figured based on 90% of current year’s tax, the tax is an estimate as it is figured before the tax year is completed. For example, 2022 estimated tax figured on 4/15/2022 based on 90% of 2022 tax includes estimate of income from 4/15/2022 to 12/31/2022.

The estimated tax our firm provides to our clients along with the income tax returns are based on 100% of prior year’s taxes since we cannot make any assumptions on clients’ income for the remaining tax year.

Due to the above, the total estimated tax may be a lot greater than the actual tax expected for the current year if there is a significant decrease in income from prior year to current year. If you want your estimated tax to be refigured, please contact our office for tax projection consultation.

4. Example (2022 Estimate Tax Figured)

A taxpayer has completed or expecting the following:

• Total tax of $10,000 for 2021 tax year (fully paid).
• Total tax of $4,000 for 2022 tax year (estimated).

Based on the above, the taxpayer must pay the smaller of:

• 100% of prior year’s tax or $10,000; or

• 90% of current year’s tax or $4,000.

Overall, the taxpayer is required to pay at least $3,600 (90% of $4,000) over 4 equal payments ($900 per payment).

If the taxpayer only pays $800 for each payment, the remaining due of $400 will be subject to estimated tax penalty.

1. Types of Tax Penalties

 IRS may impose the following penalties on individual tax returns:

• Failure-to-File Penalty

• Failure-to-Pay Penalty

• Underpayment of Estimate Tax Penalty

  • For information on Estimate Tax Penalty, please refer to the article below.

  • Estimated Tax (Form 1040) Explained

2. Failure-to-File Penalty

Individual income tax return is due on April 15th. IRS charges failure-to-file penalty on tax returns filed after this due date. The penalty is 5% of the tax due, and it is charged monthly up to 5 months or maximum penalty of 25%.

Taxpayers can request extension of time to file by submitting Form 4868; this extends the deadline to October 15th. Taxpayers who properly filed Form 4868 will not be charged failure-to-file penalty during the 6-month extension period.

3. Failure-to-Pay Penalty

All tax payments are due on April 15th and the due date cannot be extended. Any expected tax due must be submitted to IRS along with Form 4868 before April 15th to avoid failure-to-pay penalty.

The penalty with related interest is roughly 1% a month on unpaid balance.

4. Example

A taxpayer, A, files his income tax return and pays the tax due as below:

• A filed Form 4868 on 4/10/2022, the due date is extended to 10/15/2022.

  • A expects his tax due to be $15,000.

  • Still, A pays only $10,000 along with the Form 4868.

• The taxpayer files his income tax return on 8/5/2022 with the total tax due of $12,000.

• Remaining due of $2,000 is paid after deducting the $10,000 paid upon extension filing.

The taxpayer will be charged no failure-to-file penalty. However, failure-to-pay penalty will be charged on the $2,000 unpaid balance for the period from 4/15/2022 to 8/5/2022.