Payment of Tax Withholding
IRS Form W-4 is used to record your number of exemptions and additional withholding allowances for taxes to be withheld from your earnings. If you find that you are not withholding enough taxes, the taxpayer may want to decrease their number of exemptions or list an additional withholding amount for each pay period. Not withholding enough tax could lead to a large tax bill and even an estimated tax penalty, if you're not careful.
When might you want to update your W-4?
You might want to update your W-4 if you have had a life-changing event that increases or decreases your number of exemptions or you find yourself owing additional taxes each year. Life changing events include marriage, birth of a child, death of a dependent, divorce, etc.
Most income taxes are collected on a pay-as-you-earn basis for earned income and various pensions. However, the amount of tax collected might not be sufficient when you start to take a look at other income generated, such as IRA distributions, interest, dividends, business income and capital gains.
For taxpayers expecting their 2013 tax liability to exceed $1,000 after taking into account taxes already withheld and any credits that might apply, then they should make quarterly tax payments. If estimated tax payments are not made in a timely manner, the taxpayer could be subjected to an estimated tax penalty.
Installment Tax Payment Plans:
In some cases, a taxpayer cannot pay the full amount due on their return at the time of filing. Actions they can take include the following:
- IRS will normally grant a 120-day extension with interest charges only, in some cases a late penalty may be imposed (short-term extension)
- For more than 120 days, the taxpayer should request an installment agreement on Form 9465, interest will be charged along with a likely late payment penalty.
IRS will typically charge a payment plan processing fee between $50 to $120, and the late payment fee can drop from 0.5% to 0.25% (per month) if an installment agreement is reached and the taxpayer filed their return on time.
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