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Pay As You Go: What Does It All Mean?

Updated: Jun 1

Liberty Financial Solutions, LLC: We worry about the IRS so you don't have to...


Pay As You Go: What does it all mean?

Federal income tax is pay as you go.
Tax Resolution Specialists, Mansfield, TX

Pay As You Go: What Does It All Mean?


You've probably heard that the United States income tax system is a "pay-as-you-go" system. But what exactly does that mean, and why does it matter? In short, this means that you, the Great American taxpayer, must pay your income tax as you earn your wages or income throughout the year. Before you panic, most of you are probably doing it now without even realizing it. As detailed below, there are 2 ways that American taxpayers pay-as-they-go.

#1: Witholding


If you're what the IRS calls a "wage-earner (what you and I would call an employee)," your employer is generally responsible for withholding income tax from your paycheck every time you get paid. Your employer then remits the amount of tax they withheld from your paycheck to the IRS on your behalf throughout the year. In essence, you're "paying as you go" throughout the year.


The problem arises if you have "too little" income tax withheld from your wages. If this occurs, you could be subject to an underpayment penalty. If you think this might apply to you, you can give your employer a new "Form W-4, Employee's Withholding Certificate," to increase the amount of withholding. Alternatively, you can make estimated tax payments.


One way to make sure you're having enough tax withheld is to use the "Tax Withholding Estimator" at www.irs.gov/w4app.


#2: Estimated Payments


If you're self-employed, or if you don't have enough tax withheld from your paycheck, you likely should be making quarterly estimated tax payments. Estimated tax payments are generally due April 15th, June 15th, September 15th, and January 15th (the following year). You'll want to complete Form 1040-ES with each estimated tax payment.


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Why It All Matters


As mentioned above, if you don't have enough taxes withheld or pay enough in estimated taxes throughout the year, you may be subject to an underpayment of estimated tax penalty. You can avoid this penalty if your income tax return shows that you owe less than $1,000 in taxes or if you paid the lesser of 90% of the tax shown on the return for the taxable year or 100% of the tax shown on your prior year return.


If this seems confusing, that's because IT IS!


If you have questions or need help, please reach out to us today at 817.995.5008 or www.libertytaxdefenders.com. Of all the penalties asserted by the IRS, the estimated tax penalty is one of the easiest to avoid by proper planning and diligence.


Cheers!


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