Question

Federal Withholding Taxes versus Estimated Tax Payments 1. Summarize the difference between federal income tax withheld and federal estimated tax payments. 2. Summarize the general rule for federal estimated tax payments. You may use the following sources to research the answers: (1) learning objectives 9.1 and 9.2 of your text book, or IRS Publication 505 “Tax Withholding and Estimated Tax” for use in 2017 at https://www.irs.gov/pub

Answer 1

FEDERAL TAX PAYMENTS

Federal income taxes are paid on all “earned income” and, although withheld by your employer and remitted on your behalf, are not paid by your employer. The taxes are deducted from your wages and earnings. You also are liable for taxes on other income, such as (some) Social Security benefits and unemployment payments, but these taxes are not “withheld” in the manner that taxes are deducted from your paycheck. You simply must report such income when you file your taxes and pay any amount owed. Your federal tax amount is unfixed, meaning that you pay a larger percentage of your income as you earn more (up to a 35 percent limit for those making $379,150 or more in 2011).

FEDERAL TAX WITHHELD

The amount that is withheld from an employee's paycheck in order to pay income taxes is determined based on the person's income level and the number of exemptions that the person claims. Withholding is usually done in standard amounts based on formulas provided by the IRS. Employees can adjust their income tax withholding by filing Form W-4 with their employer and designating the number of withholding allowances they wish to claim. Employees decide upon the number of withholding allowances they wish to claim based on their expected tax liability, which depends on their filing status, family circumstances, other sources of income, and available deductions or tax credits. It is not advisable to overpay taxes—even though the extra amount is eventually refunded to the taxpayer—because it is like giving the government an interest-free loan. At the same time, it is not advisable to underpay taxes because it may be difficult to come up with a lump-sum payment when it is due on April 15. In addition, a taxpayer who underpays his or her income taxes by more than 10 percent may face a penalty and have to pay the government interest on the funds owed.