Estimated Tax Payments: Federal
Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, then you may have to make estimated tax payments. If you are in business for yourself, then you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.

If you don’t pay enough tax through withholding and estimated tax payments, you may have to pay a penalty. You also may have to pay a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.

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.

Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.

You may have to pay estimated tax for the current year if your tax was more than zero in the prior year.

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.

To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you don’t pay enough tax by the due date of each of the payment periods, then you may be charged a penalty even if you are due a refund when you file your income tax return.

Estimated Tax Payments: California
California, like federal law, imposes estimated tax underpayment penalties unless:

• The "required annual payment" is 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the preceding taxable year; and

• The 100% prior-year tax is increased to 110% if the taxpayer's prior-year AGI exceeds $150,000 or $75,000 for married filing separate (using California AGI).

California Taxpayers may minimize these penalties by using the annualized method (especially if the capital gain is recognized later in the year). However, estimated tax payment penalties may be completely avoided if taxpayers had a minimal tax liability in the prior year due to adequate withholding.

E-Pay Requirements: California
All payments made by an individual or corporation, regardless of taxable year or amount, must be remitted electronically after the individual or corporation has either:

• Made a single estimated tax or extension payment greater than $20,000. (Note: A passthrough entity elective tax payment paid by a passthrough entity on behalf of a qualified consenting owner is not treated as an estimated tax payment of the owner and therefore does not count toward the owner's $20,000 estimated tax threshold); or

• Filed an original return with a tax liability greater than $80,000 (the passthrough entity elective tax payment reflected on the return does count toward this $80,000 threshold).

The triggering payment does not need to be made electronically. Even if the FTB has not notified the taxpayer, once the return showing the tax liability is filed, all future payments must be made electronically.

Missing Information: California
One issue that lands in front of the Office of Tax Appeals on a regular basis involves taxpayers seeking late-payment penalty abatement due to reasonable cause as a result of their receiving late K-1s from partnerships in which they held minority interests. These taxpayers are very rarely successful in obtaining penalty abatements. Time and time again, the OTA will find that late K-1s were no excuse because the taxpayers failed to show what efforts they made to timely obtain the information.

Failure to pay the amount of tax shown on a return in a timely manner is not excused by:

• Lack of necessary information or documents;

• The fact that information is lost, inaccurate, or difficult to obtain;

• A taxpayer's difficulty in determining income with exactitude; and

• Complexity and problems in accumulating the necessary information and/or documents.

Remember, even if the taxpayer does not have the correct information, if they make extension payments based on the best information available, then the FTB and OTA are unlikely to impose or uphold late-payment penalties if the taxpayer can demonstrate the efforts they made to obtain the information.

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