Quickbooks, Bookkeeping and Accounting Blog

Now that your 2007 tax return is final, it is time to take a look at what you are paying in for 2008 and make sure you are paying in enough to avoid penalties when you file your 2008 tax return. There are two ways to avoid penalties:

• You can avoid paying penalties by paying in 90% of what you will owe in 2008.
• If your AGI in 2007 was less than $150,000, you can avoid penalties by paying in 100% of your 2007 tax liability. If you 2007 AGI was greater than $150k, then you must pay in 110% of your 2007 tax liability to be sure of avoiding penalties.                 

Obviously, the two ways to pay money in are via withholdings and estimated tax payments. It is important to be aware that withholdings and estimated tax payments are not treated equally by the IRS. Estimates tax payments are applied only to the quarter they are paid in for. Total withholdings paid during the year are divided by four and then applied to each quarter in equal parts.

This is important to consider as penalties are determined on a quarterly basis, meaning that even if you have enough in at year end, you will owe penalties if you are behind on a quarterly basis (example: if $20k is the minimum amount of federal withholdings you need to pay in for 2008, your first quarter estimated tax payment + 25% of your total 2008 federal withholdings must equal at least $5k).