Trucking & Taxes – August/September 2023
Every year, we receive questions from new clients about estimated tax payments and whether or not they need to make them.
Before we answer that, let’s explain estimated taxes a bit.
The U.S. tax system is pay as you go. To put it simply, the IRS wants you to pay a sizable portion of what you owe in taxes before the April 15 tax deadline. Most – if not all – U.S. W-2 employees have federal and state tax withholdings regularly taken out of their wages, which usually cover most of their tax payments for the year.
The payroll withholding tax payments are intended to ensure that you have paid enough tax by the end of the year to cover the tax for the year. However, under certain circumstances, people need to make estimated tax payments, which are essentially pre-payments required by the government.
If you fail to make required quarterly tax payments in the correct amounts, then the IRS will assess the penalties.
Basically, estimated tax is the method used to pay tax on income that is not subject to withholding, such as self-employment, interest, dividends, rent and alimony.
Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.
The estimated tax formula is fairly straightforward. Generally speaking, you either need to pay at least 90% of your current year’s taxes or 100% of your prior year’s taxes, whichever is less. If your annual income is above $150,000, then your second option is to pay 110%, not 100%, of your prior year’s taxes.
When do you pay estimated taxes?
The deadlines set by the IRS for 2023 are:
- First payment due April 18, 2023 – first quarter, Jan. 1-March 31
- Second payment due June 15, 2023 – second quarter, April 1-May 31
- Third payment due Sept. 15, 2023 – third quarter, June 1-Aug. 31
- Fourth payment due Jan. 15, 2024 – fourth quarter, Sept. 1-Dec. 31
These are set every year on the 15th of those months unless it falls on a weekend or holiday.
Do you have to do estimated taxes your first year as an owner-operator?
The simple answer is maybe. But even if you are not required, you should set money aside for that tax bill to come on April 15.
Follow up with your tax preparer, and you should be able to have them look at your situation and determine the need to make estimated tax payments.
Or follow these rules to determine for yourself if you will owe estimated taxes.
How do you calculate your estimated taxes?
There are three ways to calculate quarterly tax estimates.
You should consult your prior year’s tax return and any tax paperwork from the current year, including any estimated tax payments and withholdings that you have already made to that point.
Of course, you also will need to have a solid estimate of your expected gross income for the year, as well as any deductions and credits that you plan to use.
FIRST method: You can guesstimate the amount of tax you’ll owe for the year, and then send one-quarter of that to the IRS. That’s not recommended, but it works for some. For example, if you guesstimate that you’ll owe $10,000 in taxes for 2023, then you can send $2,500 in estimated taxes to the IRS for each of the four quarters.
SECOND method: You can estimate your taxes based on what you have earned during the year. If you earn income unevenly – perhaps you earn 80% of your income in the last quarter of the year – then you can make unequal estimated tax payments. In this method, you are paying taxes based on how you earn your money. This process, which is known as annualizing your income, could help you avoid a penalty.
You do need to be prepared to file additional forms with your tax return showing when your income was earned throughout the year.
THIRD method: The most common way of doing it is by basing estimated taxes on your prior year’s return. Consider what you owe in taxes for 2022 and pay at least 90% of what you owed. However, if your annual income is above $150,000, then your option is to pay 110% of your prior year’s taxes. You also need to consider any adjustments for less or more withholding on your or your spouse’s W-2 paycheck or withholding on pension/retirement withdrawals.
Where do you pay estimated taxes?
There are several ways to pay your estimated taxes. The IRS (and almost every state) allows you to pay online – and that is certainly the best option. The payment will end up where you want it to go, and you’ll know when the respective government receives it. You can also mail a check or money order to the IRS with an estimated tax voucher 1040ES, or pay through the IRS Direct Pay, Pay1040.com or even by phone.
How do I know if the IRS received my estimated tax payment?
Check your bank or credit card to see if the transaction is processed. If it’s been at least two weeks since you sent the payment to the IRS and your financial institution verifies that the check hasn’t cleared your account, call the IRS at 800-829-1040 to ask if the payment has been credited to your tax account. If mailing to the IRS, we suggest mailing with tracking so you know they received the payment. Another option is to log in to your IRS account and see if it has posted for the current tax year.
What happens if I don’t pay estimated taxes?
If you don’t pay your required estimated taxes, you could be subject to IRS penalties. The penalty is 0.5% of the amount unpaid for each month, or part of the month, that the tax isn’t paid. The amount you owe and how long it takes to pay the penalty affects your penalty amount.
However, if you don’t pay enough estimated taxes, you might be at risk of receiving a penalty as well. Most of the time, knowing the final amount of tax you are going to owe is not easy or exact. So if you are short, the IRS does offer a safe harbor method to help avoid the penalties. The safe harbor is keeping your underpayment less than $1,000.
Can I make the whole estimated taxes for the year all at once?
Yes, if it is all on the first payment due date. But why do that when you could keep your money and invest or earn interest yourself instead of letting Uncle Sam hold your money without interest? If you choose to make the whole payment on the due date of the second or third estimate you would still possibly owe penalties for the unpaid period(s).
Can I avoid making estimated taxes?
Yes, if you or your spouse has a W-2 job, you can increase the withholdings to cover estimated taxes. That also goes for those who run their business as an S corporation. You can increase your federal and even state withholding to cover all estimated taxes as well.
Can you get penalties waived?
The law allows the IRS to waive the penalty if you didn’t make a required payment because of a casualty event, disaster, or other unusual circumstance, and it would be inequitable to impose the penalty.
To request penalty abatement or waive interest due to an unreasonable error or IRS delay, you or your representative must submit:
- Form 843, claim for refund and request for abatement.
- A signed letter requesting that we reduce or adjust the overcharged interest.
What about state estimated taxes?
Most all states that have income tax require some estimated taxes, please consult your tax professional to determine your state estimated taxes.
Also of note, taxpayers who live in places subject to natural disasters are subject to changes that are regularly made regarding the quarterly due dates for estimated tax payments.
Be sure to check with your tax professional today to verify the need to make estimated tax payments or update the estimated taxes that may be owed for tax year 2023. LL
This article has been presented by TruckerTaxTools.com, a division of Taxation Solutions Inc. – Tax Relief. Barry G. Fowler, EA, president of Taxation Solutions, has been providing IRS tax debt resolution and bookkeeping services to the trucking industry for more than 21 years. If you would like a free consultation, contact them at 877-966-2477. Their website is TruckerTaxTools.com. This article does not give and is not intended to give specific accounting and/or tax advice as everyone’s tax situation is different. Please consult with an expert at TruckerTaxTools.com, the leader in trucker taxes.