Helping Taxpayers With Estimated Taxes, All Part of An Enrolled Agent Job
Preparing tax returns and negotiating with the IRS are common activities of enrolled agent work. But, as a trusted tax adviser, an enrolled agent also explains tax matters in understandable ways to clientele. A commonly addressed situation is estimated tax payments.
For taxpayers who are newly self-employed as sole proprietors or independent contractors, estimated taxes are usually a mystery. As this happens to an increasing number of individuals, keeping abreast of the subject with enrolled agent continuing education is quite important.
Remaining thoroughly familiar with estimated taxes involves more than just proficiency in the calculations. The purpose of detailed understanding is for an enrolled agent job to include the ability to simplify descriptions of the complex. Estimated taxes are certainly one of those subjects.
The general objective of estimated tax payments that is relevant to taxpayers is avoiding underpayment penalty. Even if all tax liability is paid by April 15 after a year ends, the IRS usually imposes penalties if the unpaid amount at this tax-filing deadline exceeds $1,000.
In addition to self-employment activities, estimated tax payments become necessary when income is generated from rents, dividends, interest, and capital gains. In order to cover the additional tax liability from these income sources, a taxpayer who also has wages or retirement plan distributions is entitled to simply increase tax withholding.
Another avenue for paying a person’s tax liability that is explored in enrolled agent study is to increase the withholding on a wage-earning spouse. This is an effective technique if the spouses file a joint tax return.
Although the profit of an S corporation is not considered self-employment, it is taxable income for the shareholder. But an S corporation shareholder who also works for the business can increase the withholding on wages in order to cover the tax liability on the profit.
If there are no options to pay income tax via withholding, estimated tax payments are required. Tax is normally paid in four equal payments. Paying in proportion to income in each of the four periods is permitted. However, this is a complicated process because the tax owed for a particular period is affected by annualized income, not just the income of the period. This requires some difficult predictions to avoid underpayment penalty.
The common safe harbors for avoiding penalty are covered in enrolled agent education. Averting the penalty is accomplished by paying 90 percent of the current year tax assessment or 100 percent of last year’s tax. Substitute 110 percent of the amount from last year for taxpayers with adjusted gross income exceeding $150,000. An enrolled agent’s advice is sound by explaining that four equal payments for this year that equal last year’s tax is a simple way to avoid penalty – but can result in a tax bill next April 15 due to rising income.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.