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Tax Season – The Good, The Bad and The Ugly

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February 20, 2014

- Deductions, IRS penalties, IRS Problems, IRS Tax Problems, Money, Tax Audit, Tax Credit

your taxesThe Good, The Bad and The Ugly is a catchy phrase and makes reference to one of the most popular “spaghetti” western movies. This phrase seems to describe lots of situations we experience. In this case….Income Tax Season. In January, I talked about the different tax forms you need to watch for. Most will come to your mailbox while others will be sent to you electronically. You may even be able to download them yourself from secure websites. Some of my clients last year didn’t really understand why I couldn’t finish everything in progress by April 15th. Sometimes it is just not possible. There are only 24 hours in any one day. No one person can work well without sleep day after day.. The clock ticks away every minute. We simply run out of time. I tell everyone in my first letter of the tax season that I may file an extension for returns not completed by April 1st. What does “extension” mean? Quite simply, it is a request for more time to file a tax return. An extension is not automatic. And it is not a request for more time to PAY your taxes. It is important to know that if your taxes are not paid in full by the due date of your return, the extension will not be valid. In other words, if you owe tax on April 15th and do not pay that tax by April 15th, no request for more to time to file will be valid. In other words, your return will be considered late, or delinquent. Interest and penalties may apply to that balance paid after April 15th. How can you change this undesirable position? Even if you have given your preparer everything necessary to file a proper return, you may still want to file an extension. The key is having your tax paid in full.  You can send a payment in with your extension request. Realize this is a request, it is not automatic. An extension will only give you more time to submit your tax return. Do you need to increase your paycheck withholding? Do you need to adjust the amount you pay with your quarterly estimated tax payments? Did you have something unusual happen during the year that caused you to owe more tax this year than in earlier years? The bottom line is, if you know for certain you will not owe taxes on April 15th, you can request that extension for more time to submit your return without penalty. Be sure to mark your calendar so you remember your new extended due date. Any return filed after that date will be considered delinquent. And a late return with taxes due will cost you interest and penalties.
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It’s Official! Finally, Tax Season Has Begun

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February 13, 2014

- Deductions, IRS Audit, IRS penalties, IRS Problems, IRS Tax Problems, Tax advisor

irs tax auditWhen our Congress shut down the government last fall, even the program developers at the Internal Revenue Service had a couple of weeks of involuntary vacation. I say vacation because they were ultimately paid for these layoff days.  I thought these people would have been considered indispensible.

The Internal Revenue Service is the ONLY branch of the government that actually brings money IN. I thought, certainly, their tax return form designers and processing system programmers would be considered essential. The Internal Revenue Service claimed that this interruption of work made it impossible for them to be able to accept any tax returns before January 31st. We used to start filing returns electronically the second Friday of January. The government has shaved three weeks off our already time-compressed income tax season and while the start date was extended, the due date was not.  

Individual 1040 series tax returns are still due April 15th. Corporation returns are due March 15th. Partnership returns are due April 15th. What if YOU need more time? That is why we have the ability to request an extension to file. These requests are never turned down. The IRS automatically says YES to your request for more time to file, but you MUST file the paper to let them know you are extending your tax return due date. The extension only gives you more time to send in the paperwork. The extension does not give you more time to pay any tax that might be due with your tax return. So it is important that you estimate how much you expect your taxes will be. If you don’t have enough federal income tax withheld from your paycheck, you can make an Estimated Tax Payment. I’ll talk more about Estimated Tax Payments in my next blog. Who signs your tax return?  You sign your tax returns under penalty of perjury. You are swearing your return is correct. If  you paid someone money to prepare your return, they must also sign your return. They are stating they have done everything they can to apply the tax laws properly. They are attesting they have prepared an  accurate return.  If you pay them and they don’t sign the return, then they are breaking the law and you need to find a reputable advisor. The IRS will want to put them out of business because you deserve someone on YOUR side. You certainly do not want someone working to put you on the INSIDE – inside the “tax jail”, that is. Just because you pay someone to prepare your return, and just because they sign your return right under where you sign, YOU are still the one responsible for paying your correct tax.  YOU are the one the IRS will call to collect the tax. So take the time you need to collect your tax data. “Haste makes waste” and can cost you interest and penalties. Be sure to report all of your income. Take the deductions you are allowed to take. Don’t guess about your numbers. Be accurate. Double check your numbers. Review your return. File electronically.
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Attention Employers: W2 Forms and 1099 Forms are due out by January 31st!

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January 30, 2014

- IRS Audit, IRS Audit Help, IRS Audit Process, IRS penalties, IRS Tax Problems

irs tax auditAre you ready to file these required forms? The LAST thing any employer wants is to be delinquent in the employer’s tax filing requirements. What is required and when? .. December 31st marked the end of the fourth quarter of the calendar year. Fourth quarter employers’ reports due by January 31st. You must give your employees their W2 forms by January 31st. You must also give any independent contractors their Forms 1099 Miscellaneous by January 31st. Caution: Do NOT make the costly mistake of treating an employee as an independent contractor! Attention Employees – the next blog is devoted to YOU! .. In addition to the W2 forms given to the employee, you must also send a copy to Social Security Administration (SSA) with the transmittal Form W3. If you withheld state taxes for the benefit of your employee, you must send a W2 copy to your state (with your state’s W3 equivalent). Form W3 must be filed with SSA by the last day of February. I tell my employer clients there is no penalty for filing early. If you file the W3 at the same time as you issue the W2 forms, you are more likely to file it on time. There is no real benefit in waiting to file these forms. .. Most employers file the quarterly report Form 941 to report the taxes withheld from the employees’ paychecks. The taxes withheld include the employees’ federal income taxes, Social Security taxes and Medicare taxes. PLUS the employer matches the Social Security and Medicare taxes. If you are self-employed you are considered both employer and employee and you pay the full 15.3 percent of earnings. .. You may be a small employer that has been given permission from the IRS to file an annual Form 944 instead of the quarterly Form 941. Form 944 is due by January 31st for the preceding calendar year’s wages paid. .. In addition to Form 941 (or Form 944), Forms W2/W3 and state equivalent forms, you must also file (and pay) by January 31st, your 4th Quarter state income tax withholding report, file (and pay) your 4th Quarter state unemployment tax report, and file (and pay) your annual federal unemployment tax report Form 940.  Only the first $7000 of wages paid to a covered employee is generally all that is subject to Unemployment tax. Remember to take into account any deposits you made during the earlier quarters for federal unemployment taxes.

To recap:

By January 31, 2014:

1. File Form 941 for the 4th quarter 2013 OR Form 944 for the whole year 2013

2. File your state’s 4th Quarter 2013 income tax withholding tax reports

3. File your state’s 4th Quarter 2013 unemployment tax report

4. File Form 940 for the whole year 2013 federal unemployment tax report

5. Give Forms W2 to your employees

6. Give Forms 1099 to your independent contractors

By February 28, 2014 :

1. Send Form W3 with Copy A of all Forms W2 to Social Security Administration

2. DO not mail the W3/W2 to IRS, it goes to SSA

3. Mail Form 1096 with IRS copy of Forms 1099 to the Internal Revenue Service.

4. 1096 is the form that goes to IRS

5. I’s OKAY to file these transmittal forms in January. You don’t have to wait till February 28th.

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Watch Your Mailbox for Important Tax Forms! Part Two:

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January 23, 2014

- IRS Audit, IRS Audit Help, IRS Audit Process, IRS Problems, IRS Tax Problems, Tax Audit, Uncategorized

taxes2For those that can file the simplest of tax forms, you may have your W2 and are ready to file. Last week I talked about W2, W2-G, 1099-G, 1099-Misc and K1 forms. Today I talk about more of the common forms you need to complete your proper tax form. 1099-R is used to report distributions paid to you from your pension plan, your retirement plan or our Individual Retirement Account or IRA. If you have a distribution that is not taxable, it must still be taken into account in filing your proper tax return. 1099-INT is sent to you when you earn $10 or more interest on a bank account or certificate of deposit. You should get one of these forms for each account that generated $10 or more of interest. If you have more than one account at a single branch, they may report each account separately on a single, or consolidated, statement. Some banks show each account and provide the total earnings for all accounts. Whether or not you withdrew the interest, or had it in your hot little hands, this is taxable income that must be reported. If you earned less than $10 you are still required to report the interest earned, you just won’t get the Form 1099-INT to remind you. In this case, you’ll need to check your account statement that includes December 31st. 1099-DIV reports to you earnings of $10 or more in dividends paid on stocks, bonds and mutual funds. Like 1099-INT, you are responsible to report all earnings even if you had less that $10 and do not get this form. 1099-DIV also includes capital gains paid on these investments. These capital gains are for activity within you account, not for the sales of stocks from your account. Both ordinary dividend and capital gain dividend numbers are important in calculating your proper tax. Your tax professional will see that you don’t overpay your tax.  1099-B reports your sale of stocks, bonds or mutual funds. You receive Form 1099-B from your broker or mutual fund company. This form can be one page or multiple pages depending on the size of your account. For each sale this report will tell you the name of the stock or fund account, how many shares were sold, the date of the sale and the sales price. Some brokers issue a preliminary report to meet heir February 15th deadline to issue this Form 1099-B, but they will tell you to expect a corrected or final statement later in the tax season. Provide EVERY page of this report to your tax advisor. 1099-C reports Cancellation of Debt income which must be reported on your tax return. This income may or may not be taxable to you. It can be issued because you were unable to pay a debt, perhaps credit card or mortgage debt. Be sure to share this information with your trusted tax advisor.  The US Tax Code states all income is reportable except that which is specifically exempt from tax. Protect yourself from IRS audit by reporting all of your income.
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Watch Your Mailbox for Important Tax Forms! Part One:

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January 15, 2014

- IRS Audit Help, IRS Audit Process, IRS penalties, IRS Problems, IRS Tax Problems

jan 31January 31 is the deadline for many of your “Important Tax Information” reports to be mailed to you. You may even have received some of them early. They truly are important for you. They are a goldmine for identity thieves, so get them out of your mailbox and into a safer place right away. .. The reason we are getting them in the first place is that they are also important to the IRS.  The IRS gets copies of these forms as well and if you happen to forget to include income on your return…don’t worry because the IRS will certainly be contacting you. .. W-2 is the key form for employees. You need to report the wages you earned from each employer you worked for during the year. This form also reports the income taxes withheld from your earnings and other important information. .. 1099-MISC  is the key form for independent contractors or business owners. Much like the W-2 for employees, this is the form that businesses report total yearly payments of $600 or more to workers who are not considered employees. If you think you are an employee and get a 1099-Misc instead of a W-2, I’d like to consult with you. If your business has taken the steps to become a corporation or partnership, you may receive a W-2 or a K-1. .. Form K-1 is used by various entities to report earnings and other tax return related information. S-Corporations, Partnerships, Trusts and Estates use this form to “pass through” income and expenses to owners, partners and heirs. Your  tax return cannot be completed until this K-1 is reviewed. If the business has filed an extension of time to file the business return, you may not get this form until close to, or even after, the April filing deadline for individual returns. If this is the case for you, you will need to file an extension for your individual tax return. .. W-2G is used to report Gambling Winnings. There are different reporting requirements depending on the type of game you won. Just because you were the WINNER does not mean are ahead “of the game.” and had a profit. It means you had a WIN. To avoid an IRS inquiry, report ALL gambling winnings, whether or not you received a W2G. Be sure to keep a log of your Gambling Activity. See my blog on Gambling Winnings and Losses for more information. .. 1099-G is issued by states when you receive a tax refund of state or local taxes. This refund may or may not be fully taxable to you. Consult with your tax advisor. A separate form of this same number will also report unemployment benefits paid to you. Unemployment benefits received are income taxable and must be reported on your tax return. .. Next week we’ll cover more of the 1099 series of forms you need to watch for. .. The US Tax Code states all income is reportable except that which is specifically exempt from tax. Protect yourself from IRS audit by reporting all of your income.
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Top 7 Questions to Ask Your Tax Advisor

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January 8, 2014

- IRS Audit, IRS Audit Process, IRS Problems, IRS Tax Problems, Tax advisor, Tax Audit, Tax Audit Help

padpaperThe tax industry is ever changing. Tax professionals are subject to various federal and state regulations. The Internal Revenue Service was sued to stop them from requiring all tax return preparers to take a test to prove their competence to properly apply the tax laws. Enrolled Agents (EAs), Certified Public Accountants (CPAs) and Attorneys have already demonstrated their competence by passing other comprehensive tests. Some in this group of un-enrolled preparers have been writing tax returns for many years. Some are brand new to the tax business. They all were to take a test to demonstrate their knowledge and level of competence. No one could use the designation RTRP, Registered Tax Return Preparer, until they passed this test. The IRS is appealing the lawsuit’s decision. I see nothing wrong with the IRS protecting their tax-paying public (YOU) by ensuring that all tax return preparers show some level of competence. No single person can know everything. There are many areas of specialty within the tax code and ever-growing procedures, regulations and rulings. I help individuals and small business owners. Big corporations and partnerships are outside my area of expertise. Anyone can make a mistake. Yes, we learn from our mistakes, but wouldn’t  you rather that I learn from someone else’s mistake?  The IRS does and they want EAs and CPAs to keep up with the ever-changing tax laws. We do this by taking required annual continuing professional education (CPE). I like the medical doctor’s Hippocratic Oath, “first do no harm.” I follow that in my tax business. I always want to do my best for you. These brief descriptions give you a glimpse of what these professionals can do. An EA, Enrolled Agent, is licensed by the Department of Treasury to represent taxpayers nationwide at all levels of the Internal Revenue Service. A CPA, Certified Public Accountant, is licensed by their State’s Board of Accountancy to perform accounting services in that state. Those same Boards of Accountancy limit the use of the word “accounting” to their recognized CPAs. Some CPAs also practice tax. Some EAs also offer bookkeeping services. Attorneys are admitted to their State’s Bar. Attorneys who are admitted to the Tax Court can represent taxpayers at that level of IRS Appeal. Here are 7 questions you can ask to help ensure you find an experienced, trustworthy tax advisor:
  1. How long have you been in the tax business?
  2. What licenses or designations do you have?
  3. What tax issues do you specialize in?
  4. Do you have the knowledge and experience to handle my tax situation?
  5. Do you outsource any of your work?
  6. What’s your privacy policy?
  7. How do you charge your fee; how much will it cost?
It is important that you establish a comfort level with your tax advisor. You want to feel safe (and you want to feel your information is safe) when you share your important and confidential tax return information with your trusted advisor.
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What is Your Beginning of the Year Odometer Reading?

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January 4, 2014

- IRS Audit, IRS Audit Help, IRS penalties, IRS Problems, IRS Tax Problems

Odometer2What are you going to do different this year than you did last year? If you use your car for business I hope you remembered to write down, yes on paper, your odometer reading. If you didn’t do this before you got behind the wheel on the first day of the year, it’s not too late to start this process today. What good is this Beginning of the Year Odometer Reading? This is just one step on the “Prove It!” scoreboard if you are ever in a contest with the Internal Revenue Service. This contest is also known as an IRS TAX AUDIT! This audit can be started by the IRS, but they work hand in hand with the states and this audit can also be started by your state’s Department of Revenue. By working together, these agencies  are sharing the workload AND they are sharing the results with each other. Most state tax returns begin with the results of your federal return for that same year. If the IRS makes an adjustment on your federal tax return, you can be darn sure they will tell their counterpart at your state’s tax office. And if your state makes an adjustment, corrects a mistake, disallows (throws out) a deduction, adds income you failed to include (ignored or didn’t even remember you received), you can be sure they will tell “the feds.” Record-keeping is your safety net and YOU must keep the documentation you need to prove the position you take on your tax returns. Because in an audit, you are considered guilty until you prove yourself innocent. CAUTION:  Do not  throw away old tax returns just because we turned another page on the calendar. ALWAYS keep your copy of the tax returns you filed FOREVER!  Why that long? Why not just three or five or seven years? You never know when you need to look back at an earlier year’s return. In 2013, I was amending a 2009 tax return. It had a tax benefit that was to be carried BACK two years to 2007. Since I was the preparer on both years, I had the preparer copy of both years’ returns. But if you were my new client, would you have that 2007 return for me? Another client is inheriting an IRA from her mother. Is all of that IRA taxable to her? Did her mother ever deduct her IRA contributions? Did Mom keep her copies of those earlier year returns that have now become so important to her daughter? Do yourself and your family a favor and KEEP  your tax returns forever. So, back to your New Year’s auto log. It’s never a bad habit to keep a little diary for your car, whether you want to deduct your mileage or not. If you want to sell it later, this odometer reading record helps to prove the condition of your vehicle and could get you a better sales price. Keep a record of your vehicle maintenance. When was the oil changed? When were the tires rotated? When were old tires replaced with new ones. Keep track of things like that. If you want to deduct the business use of your vehicle, the IRS does require a log of your total miles AND a log of the miles you drove for business. If you don’t want to be bothered by keeping this timely (at-the-time driven) log. you don’t have to. But if you do not keep the log, you do not get to claim the deduction. It’s as simple as that.
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Internal Revenue Service is always Watching the Clock!

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December 11, 2013

- Deductions, IRS Audit, IRS penalties, IRS Problems, IRS Tax Problems

clockDo you hear that tax clock ticking, ticking, ticking? There are certain things to keep in mind as we come to the close of another tax year. December is the LAST month in the LAST quarter of the year. What should you do before time runs out? Tax laws change every year. Moving from 2013 to 2014, we are going to experience some major changes. Some of the deductions we are used to taking are being adjusted, changed, or even eliminated. If you are a classroom teacher, your $250 ‘above the line” or 1040 front page, deduction goes back to the Schedule A for itemized deductions.  You may or may not remember that it started there. Chances are, you’ve made your purchases already this year, but if your total is under $250, now is the time to take full advantage of that little benefit. With only a few weeks left in the year, do you have any medical expenses you need to pay for in 2013? We can include in our itemized deductions unreimbursed medical expenses that exceed 7.5% of our adjusted gross income. That’s pretty technical. What you need to know is that in 2014 that “floor” rises to 10%. That just means that we will be deducting a little less.  As I mentioned in a previous article, medical is NOT the deduction I want you to benefit from… I want you to be healthy. Speaking of healthy, 2013 is the year that the Affordable Care Act, commonly referred to as “Obamacare” kicked in. There is a provision for a Premium Tax Credit to help low income taxpayers pay for heath care coverage.  However, there is also a “Shared Responsibility Penalty” for anyone who fails to maintain a minimum essential health care coverage.  Medicare counts as qualified coverage. The IRS is charged with allowing the tax credit or imposing the tax penalty. What does that mean to your tax return preparer? We will be looking to confirm your coverage. SO, 2014 is only a few weeks away. Keep your coverage and keep track of your payments. Check into getting coverage if you don’t already have it. I’ll be learning more, too. If you are used to deducting sales tax instead of state income taxes paid, that sales tax deduction will not be a choice for your 2014 tax return. Most of the big ticket items that created a big sales tax deduction were vehicles. IF, and I say IF, you need a new car, this may be the month to buy it, but DO NOT BUY IT just to take advantage of the sales tax deduction. You are still out of pocket thousands of dollars for that new car. My parents always told me, “Watch your pennies and the dollars will take care of themselves.”  So I tell you to watch your expenditures.  Take advantage of what will benefit you, but don’t lose sight of the true cost of your deductions.  
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Military Tax Benefits

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November 13, 2013

- IRS Audit, IRS Audit Help, IRS Tax Problems, Military

armyAttention Military Members: Internal Revenue Service gives special tax treatment to our Military! … I am grateful for the sacrifices of our military veterans. This week we remembered them on Veterans’ Day. … My father and my uncles all served in World War II. My schoolmates served in the Vietnam War. Many of my clients have served or are still serving in our military today. You and your families sacrifice so much to protect us. Thank you so much for your service. I am happy to help remind you of these tax benefits available to you. … Americans are taxed on their worldwide income and you are taxed on most of your income, too. But there are some specific incomes that are excludable, or not taxable. … Military pay you earn while serving in a designated combat zone is not taxable. When you are outside the United States you are allowed an extra two months if you choose to file an extension of time to file your return. If you are serving in a combat zone you have even more time. There is a complicated formula used to figure the exact number of extra days you can use. The same caution applies to everyone filing an extension: taxes not paid by April 15th will incur interest and may also incur penalties. So get those taxes paid early to avoid those extras. … If your spouse is unable to sign the tax return because they are serving in a combat zone. you are allowed to sign the return for your spouse. Most of my client spouses have power of attorney, often referred to as POA. If you do not have a POA, and you sign for your combat-zone serving spouse, attach a letter with the return explaining this. … The basic allowances for housing and subsistence are not taxable. If you own your home and pay real estate taxes, those taxes paid are still deductible even though you get the tax-free housing allowance. … Most people who have a job-related moving expense have to meet certain time and distance requirements. These requirements do not apply to military moves. Your new location does not have to be more than 50 miles from your last assignment. You do not have to stay employed in the new location for at least 39 weeks in the 52 weeks following your move. … If you receive disability pay for a combat-related injury, that disability income is not taxable to you. … If you are on full-time active duty, you generally may not deduct your uniform expenses. But if you are serving as a reservist, you DO get to deduct any uniform expense that is more than the uniform expense reimbursement you receive. … Just like any mileage to a second job on one day, reservists may also be allowed to deduct the cost of their transportation to meetings they attend on the same day after working their regular job.
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Tax Deadlines – One More Down. How many more to you have to go this year?

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October 25, 2013

- Deductions, IRS Audit, IRS Audit Process, IRS Problems, IRS Tax Problems, Tax Audit, Tax Audit Help

TaxesWe have just passed the October 15th extended deadline to file your income tax return. If you are an individual taxpayer, your next deadline might be the 4th Quarter Estimated Tax Payment which is due before January 15th for the calendar year ending December 31st. .. This can be confusing to a lot of my clients. If you think the January payment is for the current year, you are mistaken. It is for the PRIOR year. Since I work with these overlapping dates more often than you do, I have learned how to keep them straight. But if yours is the only tax return you are responsible for, these dates are often confusing. .. Who pays an estimated tax payment? Most wage earners get a paycheck. The money you take home is your “net check” after deductions are taken out. The basic deductions from most paychecks are for social security. medicare, federal and state income taxes. .. You may have income on which there is no withholding. What kinds of income might that be? Interest and dividend income, rental property profits, sales of assets, gambling winnings, spousal maintenance (otherwise known as alimony) just to name a few. .. Remember, as an American you are taxed on your worldwide income and every dollar is taxable unless it is specifically excluded. Some of the income that is not taxable includes child support, some inheritances and gifts you receive. There could be others, but I try to keep the length of these blogposts or articles to a pleasantly readable size. .. So, back to estimated tax payments. They are designed to help you pay the tax you estimate you may be liable for. The Internal Revenue Services wants you to pay this tax money evenly throughout the tax year. Taxes withheld from your paycheck are considered paid evenly through the year, even if they fluctuate from payday to payday. .. Small business owners generally do not take a paycheck. They figure their profits and make estimated tax payments to cover their income tax and their social security tax. Their tax for the year is figured when the tax return is completed. .. Estimated Tax Payments are made in four payments on Form 1040ES. The first quarter is composed of months January, February and March. The first quarter (Q1)1040ES is due April 15th. The second quarter (Q2) is for months April and May (only two months here). Q2 1040ES is due June 15th. The third quarter is back to three months, June, July and August.  with the Q3 1040ES payment due September 15th. And the fourth quarter, Q4, is the FOUR months of September, October, November and December. The 1040ES for Q4 is due January 15th of the following year. You just tell me how much you paid and when. .. It is okay to make these estimated tax payments early. If you make the payments late, the late payment penalty is figured when preparing your 1040 tax return. If you did miss a payment this year, don’t panic. Just be prepared to add a few extra dollars (depending on the amount of your estimated tax payment) to your tax bill when your tax return is prepared.
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