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There are two ways to make income tax payments to the IRS throughout the year: through the withholding amount on your paycheck, and through making estimated tax payments. If you have ever wondered about estimated tax payments, this article will explain what they are, if you need to make them, and how to make them if they are required for your tax situation.

Although you may never have had to worry about them before, a change in your income/situation may put you in a position of needing to make estimated tax payments during the year. If you fail to make estimated payments (and therefore fail to pay taxes on your income as you earn it), you may be in for a nasty surprise come tax time: a hefty tax bill along with an unwelcome penalty from the IRS.

Who is required to pay estimated tax payments?

In general, you are required to make quarterly estimated tax payments if both of the following apply:

1. You expect to owe at least $1,000 in federal tax after subtracting federal tax withholding and credits, and
2. You expect your federal withholding and credits to be less than the smaller of:

• 90 percent of the tax to be shown on your current year federal return, or
• 100 percent of the tax shown on your prior year federal return

There are additional rules for some type of taxpayers, such as farmers and fishermen.

If you receive your main income via paycheck as an employee who receives a W-2, chances are you won’t be subject to this requirement as long as your employer is withholding the proper amounts from your paychecks. The amount withheld is determined by the information on Form W-4 that you complete when you are hired.

What if you have income, but no paycheck? What if you have lots of income in addition to your paycheck? Chances are you will need to make estimated tax payments (or adjust your withholding). Most taxpayers who are subject to making estimated tax payments are those who have a large amount of income on which there is no tax withholding, including interest, dividend, capital gains, rental/royalty, or business income.

If you receive a paycheck, you can avoid making estimated payments by increasing your W-2 withholdings enough to cover any additional tax liabilities. Make sure to double check with your employer, to ensure that the correct information is being used to calculate your tax withholdings.

If you do have additional income and you don’t get a paycheck, or you do, but you simply don’t want to withhold more from your paycheck, you will need to make estimated tax payments. 

What information do I need?

In order to determine the proper amount of estimated tax payments to make, you’ll need to approximate your adjusted gross income, taxable income, taxes, credits, and other deductions. Start with your prior year return information, and make changes based on what you know will be different. Form 1040-ES, which can be found on the IRS website, includes an Estimated Tax Worksheet to help you with this process. 

When are these payments due?

Estimated tax payments are generally made in four installments. Payments are due by April 15^th, June 15^th, September 15^th, and January 15^th of the next year. These dates are based on quarterly payment periods (you pay tax on income earned during each applicable quarterly period); however, notice that the payment due dates aren’t all three months apart.

As a side note, you are not required to make the final payment on January 15^th if you file your current year tax return by February 1^st and pay the entire balance due with your return. 

Where and how do I make my quarterly estimated tax payments?

There are various ways of making estimated tax payments for the current year, including:

• Mailing the payment in with a voucher – Form 1040-ES
• Paying by phone or electronically via EFTPS, the Electronic Federal Tax Payment System
• Making a payment via EFT with your prior year e-filed return
• Remitting a payment on the IRS website (or the appropriate state tax authority website; yes, you may need to make estimated tax payments to your state). Here’s the IRS link: https://www.irs.gov/payments
• Applying an overpayment on your prior year return towards your current year estimated tax payments

Why should I consider making estimated tax payments?

The main reason is to avoid penalties and interest on underpayments. This can happen if your income varies a lot from year to year; you can get surprised by the changes.

Penalties and interest can add up quickly. They are calculated based on the number of days you are late – so, even if you’re already behind, don’t panic! You can address the situation now and minimize the dollar amount of penalties you are hit with.

Getting on track with making proper and timely estimated tax payments may help you in the long run. Getting hit with a large tax bill on April 15^th is no fun, and by breaking your tax liability down into four installment payments, you may be doing yourself a big favor in forcing yourself to set those funds aside and having them available to make your payments (while simultaneously keeping the IRS at bay).

This can also help you to avoid a “snowballing” problem in the future – if you end up with a large bill that you cannot pay all at once, and you get on a payment plan with the IRS, it can be difficult to play catch-up.

Staying on top of your estimated tax payments requires you to be more disciplined and aware of your tax responsibilities as a taxpayer and/or business owner. If you need help getting these calculated or set up, please reach out any time.

If you have a bank account in a foreign country, you may need to disclose it to a branch of the government that fights financial crimes. This is what tax professionals call FBAR reporting. FBAR stands for Foreign Bank and Financial Accounts Report.

Your foreign bank accounts may also impact your tax returns. Let’s take a look at this requirement.

FinCEN and FBAR

The Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Department of the Treasury that collects and analyzes data on financial transactions for the purposes of protecting the financial system from illicit use and combating domestic and international money laundering and related financial crimes.

If you have a financial interest in or signature authority over a foreign financial account (including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account) exceeding certain thresholds, the Bank Secrecy Act (BSA) may require you to report the account yearly to the Department of Treasury by electronically filing a FinCEN 114, Report of Foreign Bank and Financial Accounts (FBAR). 

Who Must File?

United States persons are required to file an FBAR if:

1) The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States, and

2) The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

By definition, United States persons include U.S. citizens; U.S. residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States. 

Exceptions to the Reporting Requirement

There are filing exceptions for the following United States persons or foreign financial accounts:

• Certain foreign financial accounts jointly owned by spouses
• United States persons included in a consolidated FBAR
• Correspondent/Nostro accounts
• Foreign financial accounts owned by a governmental entity
• Foreign financial accounts owned by an international financial institution
• Owners and beneficiaries of U.S. IRAs
• Participants in and beneficiaries of tax-qualified retirement plans
• Certain individuals with signature authority over, but no financial interest in, a foreign financial account
• Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust)
• Foreign financial accounts maintained on a United States military banking facility 

Reporting and Filing Information

A person who holds a foreign financial account may have a reporting obligation even when the account produces no taxable income. The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.

The IRS can waive the penalty for failure to timely file or request an extension for any person required to file an FBAR for the first time. Those required to file an FBAR who fail to properly file a complete and correct FBAR may be subject to a civil penalty that generally starts at $10,000 (adjusted for inflation) per violation for non-willful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 (as adjusted for inflation) or 50 percent of the balance in the account at the time of the violation, for each violation.

The FBAR is a calendar year report and is due April 15th of the year following the calendar year being reported, with a 6-month extension available. FinCEN will grant filers failing to meet the FBAR due date of April 15th an automatic extension to October 15th each year. A specific extension request is not required. The FBAR must be filed electronically through Fin-CEN’s BSA E-Filing System. The FBAR is not filed with a federal income tax return.

U.S. Taxpayers Holding Foreign Financial Assets May Also Need to File IRS Form 8938

Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets, which is filed with an income tax return. Those foreign financial assets could include foreign accounts reported on an FBAR.

The Form 8938 filing requirement is in addition to the FBAR filing requirement. Form 8938 must be filed by certain U.S. taxpayers living in the U.S. and holding foreign financial assets with an aggregate value exceeding $50,000 ($100,000 MFJ) on the last day of the tax year, or more than $75,000 ($150,000 MFJ) at any time during the year.

Delinquent FBAR Submission Procedures

Taxpayers who have not filed a required FBAR and are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about a delinquent FBAR, should file any delinquent FBARs and include a statement explaining why the filing is late. Select a reason for filing late on the cover page of the electronic form or enter a customized explanation using the ‘Other’ option. If unable to file electronically you may contact FinCEN’s Regulatory Helpline at 800-949-2732 or 703-905-3975 (if calling from outside the United States) to determine acceptable alternatives to electronic filing.

The IRS will not impose a penalty for the failure to file the delinquent FBARs if income from the foreign financial accounts reported on the delinquent FBARs is properly reported and taxes are paid on your U.S. tax return, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

Schedules K-2 and K-3 – Do They Impact the FBAR? 

The new K-2 and K-3 schedules must be filed by all pass-through entities (partnerships, S corporations, etc.) with items of international tax relevance, including those with foreign partners and international activities. These new schedules were created to provide more clarity for shareholders and partners as it relates to calculating their U.S. income tax liability or international-related deductions, credits, etc. (for example, information necessary to fill out the Foreign Tax Credit form and calculate the credit amount).

However, these schedules are separate from the FBAR filing, which involves disclosing an interest in and/or authority over certain foreign accounts, and doesn’t directly impact income tax liability or calculation of deductions and credits. While the passthrough entities subject to the K-2/K-3 filing requirements may have their own FBAR filing requirements as it pertains to the accounts that are generating the income/deduction/other items reported on these schedules, this is not necessarily related to any FBAR reporting requirement at the individual shareholder/partner level.

Foreign bank accounts, foreign income, and foreign taxes are highly complex in their reporting requirements and their effect on taxes. It is recommended that you work with your tax professional to ensure that you are fully in compliance with disclosing all the required foreign activity and data that pertains to your specific situation.