Pay On Time To Avoid Penalties
by Julian Block
Stay on top of the
deadlines for filing federal returns and the due dates for making payments.
Overlook one and you might incur a sizable, nondeductible penalty.
Tuesday, January 18 (the
usual date of January 15 falls on a Saturday this year), is a key date for many
individuals to remember. That is the due date for the final quarterly
installment of your estimated income tax (including any self-employment tax)
for 2004, if you must make payments because your estimated tax is more than
$1,000. But it's OK to skip this final payment, provided you submit your 2004
return and pay your tax in full by Monday, January 31.
Who is supposed to make
estimated payments? Individuals with income from sources not subject to
withholding of taxes (for the most part, taxes withheld by employers from
paychecks). Mainly, they are freelance writers and other self-employeds who
operate businesses or professions as sole proprietorships, in partnerships
with others or as independent contractors.
The IRS warns that even
when withholding is subtracted from salaries, bonuses and other kinds of
earnings, it might prove insufficient. The agency can exact penalties for
insufficient quarterly payments or for failure to pay the installments on time
as they become due. It matters not that your final estimated payments are
enough to eliminate any balance due when you submit 2004's 1040 form in 2005.
There are "safe harbors"
or exceptions that relieve you of any penalties for above $1,000
underpayments. Fret not about penalties, provided you made payments for tax
year 2004 (be sure to include withholding taken from paychecks or an
overpayment of 2003's taxes that you elect to apply to 2004's bill) by the due
dates of April 15, June 15, Sept. 15, and Jan. 18 that exceed a specific
Those payments must be
more than the least of the following three amounts:
(1) 90 percent of the
actual taxes you owe for 2004.
(2) 100 percent of the
taxes you paid for 2003 (the figure on line 60 of 2003's 1040 form).
This is so even if the
amount due was zero, provided the return covered 12 months.
The second exception—the
prior year's tax—makes use of a fixed number; so it's the easiest way for
most individuals to figure their payments and escape penalties. To illustrate,
your tax payments total $11,000 for 2003 and $12,000 through estimates or
withholding in 2004. With those kinds of numbers, you are home free, no matter
how much 2004's liability turns out to be.
(3) 90 percent of the
actual taxes you owe for 2004, figured by annualizing income actually received
by the end of the quarter in question.
The third escape clause
mainly helps persons who receive the bulk of their incomes late in 2004--for
instance, freelance writers who receive book royalties in Dec.
The second exception for
the prior year's tax does not apply when adjusted gross income (the
amount on the last line of page one of Form 1040) surpasses $150,000 ($75,000
for marrieds filing separately). To take advantage of the 100-percent escape
hatch, estimated payments must be at least equal to (1) 90 percent of the
actual taxes you owe for 2004 or (2) 110 percent of your tax liability for
2003, whichever is the
Block is a syndicated columnist, attorney and former IRS investigator who has
been cited by the New York Times as "a leading tax professional" and by the
Wall Street Journal as an "accomplished writer on taxes." His "Tax Tips For
Freelance Writers, Photographers And Artists" shows how to save truly big
money on taxes—legally—and explains the steps you should take to reduce taxes
for this year and even gain a head start for future years. Send $9.95 for an
e-mailed copy or $14.95 (in the U.S.) for a postpaid copy to:
Washington Square, #1-G
Larchmont, NY 10538-2032.
Contact him at