If you’re one of the few expats who is required to pay estimated taxes, don’t wager your tax compliance on a lucky guess; this is one figure you’re going to want to be sure about. Is your guess as good as it needs to be? Find out below.
How to Know if You’re on the Hook for Estimated Taxes for Expats
When someone has an employer, tax payments are relatively straightforward: the employer deducts payroll taxes and is responsible for sending those payments to the IRS. At the end of the year, you’ll find out if you paid too much or too little and receive a refund or a bill. But what happens if you are self-employed, a business owner, or have income not earned through employment?
The process is slightly different for taxpayers with earnings from self-employment, partners, or owners of S corporations. For instance, instead of having an employer handling payroll tax filing as an employee, you’re in charge of being in compliance with any tax requirements by sending to the IRS estimated tax payments. To put it in simple terms: estimated tax payments are a means to pay taxes on income that is not subject to withholding over the calendar year. Instead of having an employer doing the withholding on your wages, you are doing it yourself. This is true at both federal and state levels.
When do you need to consider sending estimated tax payments to the IRS? Basically, if you expect to owe at least $1,000 in tax after subtracting your withholding and refundable credits, you should consider sending in estimated tax payments during the year. Also, if you owed tax in the prior year and your employment situation has not changed dramatically, you would need to send in estimated payments this year.
How to Calculate an Estimate
To calculate how much you will owe, simply multiply your quarterly income by the tax bracket your income would fall into. Depending on your income for each quarter, the estimated tax payment should be adjusted accordingly. For individuals, this IRS worksheet can help ensure you get the numbers right. A more detailed calculation is an option for corporations that sometimes requires a more comprehensive analysis of your income and expenses, the use of tax software, and the assistance of a knowledgeable tax accountant.
Estimated tax payments can be made online or by mailing in voucher 1040-ES. These vouchers are generally printed with your previous year’s tax return.
Finally (and a major point to note!), the IRS can assess penalties for underpayment of taxes if you did not pay enough estimated taxes during the calendar year. Taxpayers don’t have to pay the penalty if they owe less than $1,000 in tax with their tax return, or if, throughout the year, they paid at least the smaller of these two amounts: 90 percent of the tax for the current year or 100 percent of the tax shown on their return for the prior year – this can increase to 110 percent based on adjusted gross income.