Estimated tax is the method used to pay tax on income that is not subject to withholding, including income from self-employment, interest, dividends, alimony, rent, and gains from the sale of assets, prizes, and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Filing and Paying Estimated Taxes

Both individuals and business owners may need to file and pay estimated taxes, which are paid quarterly. The first estimated tax payment of the year is normally due on the same day as your federal tax return is due. This year, that date was April 18, 2022.

For estimated tax purposes, the year is divided into four payment periods, and each period has a specific payment due date. For the 2022 tax year, these dates are April 18, June 15, September 15, and January 17, 2023. You do not have to pay estimated taxes in January if you file your 2022 tax return by January 31, 2023, and pay the entire balance due with your return.

If you do not pay enough by the due date of each payment period, you may be charged a penalty even if you are due a refund when you file your tax return.

If you had a tax liability for the prior year, you may have to pay estimated tax for the current year, but if you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings.

Who has to pay estimated tax:

If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. If you are filing as a corporation, you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.

Special rules apply to farmers, fishermen, certain household employers, and certain higher taxpayers. Please call the office for assistance if any of these situations apply to you.

Who does not have to pay estimated tax:

You do not have to pay estimated tax for the current year if you meet all three of the following conditions:

• You had no tax liability for the prior year
• You were a U.S. citizen or resident for the whole year
• Your prior tax year covered a 12-month period

Calculating Estimated Taxes

To figure out your estimated tax, you must calculate your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. If you estimated your earnings too high, simply complete another Form 1040-ES, Estimated Tax for Individuals, worksheet to re-figure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter.

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 to enter the additional amount you want your employer to withhold. You had no tax liability for the prior year if your total tax was zero or you did not have to file an income tax return.

Try to estimate your income as accurately as you can to avoid penalties due to underpayment. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits or if they paid at least 90 percent of the tax for the current year or 100 percent of the tax shown on the return for the prior year, whichever is smaller.

When figuring your estimated tax for the current year, it may be helpful to use your income, deductions, and credits for the prior year as a starting point. Use your prior year's federal tax return as a guide, and use the worksheet in Form 1040-ES to figure your estimated tax. However, you must make adjustments both for changes in your situation and for recent changes in the tax law.

The Electronic Federal Tax Payment System

The easiest way for individuals and businesses to pay their estimated federal taxes is to use the Electronic Federal Tax Payment System (EFTPS). You can make your federal tax payments, including federal tax deposits (FTDs), installment agreement, and estimated tax payments, using EFTPS. If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc., you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments so you know how much and when you made your estimated tax payments.

Don't hesitate to call if you have any questions about estimated tax payments or need assistance setting-up EFTPS.

Tax-related identity theft occurs when someone uses a taxpayer's stolen SSN to file a tax return claiming a fraudulent refund. In the vast majority of tax-related identity theft cases, the IRS identifies a suspicious tax return and pulls the suspicious return for review. The IRS then sends a letter to the taxpayer and won't process the tax return until the taxpayer responds.

Depending on the situation, the taxpayer will receive one of three letters asking them to verify their identity:

• Letter 5071C, Potential Identity Theft during Original Processing with Online Option. This letter asks the taxpayer to use an online tool to verify their identity and tell the IRS if they filed that return.

• Letter 4883C, Potential Identity Theft during Original Processing. This letter asks the taxpayer to call the IRS to verify their identity and tell the IRS if they filed that return.

• Letter 5747C, Potential Identity Theft during Original Processing - TAC AUTH ONLY. The IRS sends this letter to a taxpayer who has been a victim of a data breach. This letter may ask the taxpayer to verify their identity in person at a Taxpayer Assistance Center.

If the IRS sends a taxpayer an identity theft letter, the taxpayer should follow the steps in the letter. That will provide all the information that the IRS needs. There is no need for the taxpayer to file a Form 14039, Identity Theft Affidavit.

When to File an Identity Theft Affidavit

If a taxpayer hasn't heard from the IRS but suspects tax-related identity theft, they should complete and submit Form 14039, Identity Theft Affidavit. Signs of possible tax-related identity theft include:

• A taxpayer can't e-file their tax return because a duplicate tax return was filed using their Social Security number. (Check that there's no error in the SSN, such as transposed numbers.)
• A taxpayer can't e-file because a dependent's Social Security number or ITIN was already used by someone on another return without the taxpayer's knowledge or permission. (Also, check that the SSN or ITIN is correct and be sure the dependent hasn't filed a separate tax return.)
• A taxpayer receives a tax transcript in the mail they did not request.
• A taxpayer receives a notice from a tax preparation software company confirming an online account was created in their name, and they did not create one.
• A taxpayer receives a notice from their tax preparation software company that their existing online account was accessed or disabled when they took no action.
• A taxpayer receives an IRS notice informing them that they owe additional tax or their refund was offset to a balance due, or that they have had collection actions taken against them for a year they did not earn any income or file a tax return.
• The IRS sends a taxpayer a notice indicating that the taxpayer received wages or other income from an employer for whom they didn't work.
• The taxpayer was assigned an Employer Identification Number (EIN), but they did not request or apply for an EIN.

The IRS will work to verify the legitimate taxpayer, clear the fraudulent return from the taxpayer's account and, generally, place a special marker on the account that will generate an IP PIN each year for the taxpayer who is a confirmed victim.

Non-tax-Related Identity Theft; No Need to File Form 14039

Non-tax-related identity theft occurs when someone uses stolen or lost personally identifiable information (PII) to open credit cards, obtain mortgages, buy a car or open other accounts without their victim's knowledge.

Potential evidence of non-tax-related identity theft can include:

• An individual receives balance due bills from companies with whom they didn't conduct business, magazine subscriptions they didn't order, notifications of a mortgage statement, and/or credit cards for which they didn't apply.
• An individual receives notices of unemployment benefits for which they didn't apply.
• An individual receives a Notice CP 01E, Employment Identity Theft.
• An individual receives a Form W-2 or 1099 from a corporation or employer from whom they did not receive the income reported, and they have not received a notice or letter from the IRS questioning them about that income.
• A taxpayer can't e-file because a dependent's SSN or ITIN was already used by someone known to the taxpayer but is not the parent or legal guardian, and the taxpayer did not provide permission for that person to claim the dependent. For additional information about this issue, please call the office for assistance.

Victims of non-tax-related identity theft don't need to report these incidents to the IRS but should take steps to protect against the type of identity theft they've experienced.

Help Is Just a Phone Call Away

Don't hesitate to contact the office if you have any questions or concerns about tax-related identity theft or need assistance with any tax-related issue.

May 1st is the traditional deadline for undergraduate students to commit to their college of choice, which means tuition payments are not far behind. If you're wondering if your child's scholarships are taxable, here's what you should know.

First, it's important to understand how a scholarship is defined. Generally, a scholarship is an amount paid or allowed to a student at an educational institution for the purpose of study. It can include both merit and need-based institutional aid. Other types of grants include need-based grants (such as Pell Grants or state grants) and Fulbright grants. A fellowship grant is generally an amount paid or allowed to an individual for the purpose of study or research.

Fulbright grants may be either scholarship/fellowship income or compensation for personal services, which is usually considered wages. If you are a U.S. citizen recipient of a Fulbright grant, you must determine which category of income your grant falls into in order to know how the grant is taxed for U.S. Federal Income tax purposes.

Tax-Free

If you receive a scholarship, a fellowship grant, or other grant, all or part of the amounts you receive may be tax-free. Scholarships, fellowship grants, and other grants are tax-free if you meet the following conditions:

• You're a candidate for a degree at an educational institution that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities; and
• The amounts you receive are used to pay for tuition and fees required for enrollment or attendance at the educational institution or for fees, books, supplies, and equipment required for courses at the educational institution.

Taxable

You must include in gross income:

• Amounts used for incidental expenses, such as room and board, travel, student health insurance, and optional equipment.
• Amounts received as payments for teaching, research, or other services required as a condition for receiving the scholarship or fellowship grant. However, you don't need to include in gross income any amounts you receive for services that are required by the National Health Service Corps Scholarship Program, the Armed Forces Health Professions Scholarship and Financial Assistance Program, or a comprehensive student work-learning-service program (as defined in section 448(e) of the Higher Education Act of 1965) operated by a work college.

Emergency financial aid grants under the Coronavirus Aid, Relief, and Economic Security Act, the COVID Relief Act, and the American Rescue Plan Act of 2021 for unexpected expenses, unmet financial need, or expenses related to the disruption of campus operations on account of the COVID-19 pandemic, are not includible in gross income.

Reporting a Taxable Scholarship on Your Tax Return

Generally, you report any portion of a scholarship, a fellowship grant, or other grants that you must include in gross income as follows:

• If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on the "Wages, salaries, tips" line of your tax return. If the taxable amount wasn't reported on Form W-2, enter "SCH" along with the taxable amount in the space to the left of the "Wages, salaries, tips" line.
• If filing Form 1040-NR, report the taxable amount on the "Scholarship and fellowship grants" line.

Estimated Tax Payments May Be Due

If any part of your scholarship or fellowship grant is taxable, you may have to make estimated tax payments on the additional income. For additional information on estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax, and Am I Required to Make Estimated Tax Payments? For more information about estimated taxes, see the article Estimated Tax Payments: The Facts above.

If you have any questions about whether your college student's scholarships are taxable, please call.

Now that tax season is over, it's time to get the new tax year off to a good start by checking your federal income tax withholding. Taxpayers can do this by using the Tax Withholding Estimator on IRS.gov. Let's take a look at why using this valuable online tool is a good idea:

The Tax Withholding Estimator helps employees avoid having too much or too little tax withheld from their wages. It is also useful for self-employed individuals who have wage income or estimated tax payments that they need to make to avoid unexpected tax bills when filing their annual returns. Having too little withheld can result in a tax bill or even a penalty at tax time; having too much withheld results in less money in their pocket. In other words, the estimator can be used to help taxpayers get to a balance of zero or a desired refund amount.

The Tax Withholding Estimator also helps taxpayers figure out whether they need to complete a new Form W-4, Employee's Withholding Allowance Certificate and submit it to their employer or make an additional or estimated tax payment to the IRS.

How it Works

The Tax Withholding Estimator asks taxpayers to estimate:

• Their 2022 income.
• The number of children they will claim for the child tax credit and earned income tax credit.
• Other items that will affect their 2022 tax return when they file in 2023.

The online tool does not ask for personally identifiable information, such as a name, Social Security number, address, and bank account numbers. The IRS doesn't save or record the information entered in the Estimator.

Gather Tax Documents

Before using the Estimator, it can be helpful for taxpayers to gather applicable income documents, including:

• Their pay stubs
• Forms W-2, Wage and Tax Statement , from employers to estimate their annual income
• Forms 1099 from banks, issuing agencies and other payers including unemployment
• Form 1099-K, 1099-MISC, W-2, or other income statement for workers in the gig economy
• Form 1099-INT for interest received
• Other income documents and records of virtual currency transactions

These documents are not needed to use the estimator but having them handy will help taxpayers estimate 2022 income and answer other questions asked during the process.

Taxpayers should be aware that the results of the Tax Withholding Estimator will only be as accurate as the information entered by the taxpayer. It should also be noted that individuals with only pension income should not use the Estimator. Those with wage income can account for current or future pension income. People with more complex tax situations, including those who owe alternative minimum tax or certain other taxes and people with long-term capital gains or qualified dividends, are advised to consult with a tax professional.

If you buy and resell products or need to purchase materials to create your own items, good management of your company's vendor records is critical. Maintaining a physical card file is way too inflexible. You can't find or edit individual records quickly or easily. They get lost or are illegible because you've updated the cards too many times.

When you create a transaction like a purchase order or write a check, you have to look back and forth between your card and the form, and it's easy to make transposition errors. And you can't generate reports – not even an alphabetized list.

QuickBooks solves all of these problems. It includes blank vendor records that you can fill in and save. You can find the ones you're looking for in a couple of seconds, and modifying them is a simple process. If you need to use vendor data elsewhere in the software, you only must select the correct entry from a list. And vendor reports are plentiful.

Here's how it works:

The Vendor Information Screen

QuickBooks displays all of your vendor records and related tools on one page. To get to it, click Vendors in your toolbar to open the Vendor Information screen. There's a list of vendors and transactions to the left and a small horizontal toolbar at the top containing action icons. But most of the page is taken up by your vendor records, displayed one at a time. To create a new one, click New Vendor in the upper left corner. A window like this appears:

Figure 1: Partial view of a QuickBooks vendor record.

Fill in the blanks to complete your vendor's contact information. Below that section, you'll enter a physical address. Click Payment Settings in the series of tabs in the upper left. Here, you can enter an account number (if applicable) and select payment terms (like Net 30). You can also specify a credit limit and indicate how the vendor's name should appear on checks. Click Tax Settings to enter a Vendor Tax ID and mark them as eligible for an IRS Form 1099 (using information from the vendor-provided W-9).

Clicking the Account Settings tab opens a window that may be confusing to you. If you're entering a phone bill, for example, you'll need to assign the correct expense account to it, which in this case would be Utilities: Telephone. That account will be automatically selected when you create a transaction for that vendor. There's space for two alternate accounts here, too, if you think you'd ever have occasion to use a different one.

Warning: You must be accurate when assigning default accounts anywhere in QuickBooks, or you may run into problems with reports and taxes. If you have questions, please call, and someone can go over this concept with you.

Click the final tab, labeled Additional Info, and you'll have two options. You can specify a Vendor Type, like Utilities or Subcontractors (or create your own) and you can define Custom Fields that will appear on your customer, vendor, and employee records. You can assign up to 18 total, no more than seven to vendors.

Figure 2: You can define up to seven custom fields for your vendor records.

When you've completed your vendor record, click OK, and it will appear in your Vendors list and be available to use in transactions.

More Vendor Options

When you highlight a name in your Vendors list, the screen changes to display their contact information in the upper horizontal pane. Click the paper clip icon in the upper right corner to attach a file and the pencil icon to edit the record.

The lower half of this screen is divided into five sections, accessible by clicking tabs. It opens to Transactions, which is a list of all of your activity with the vendor. Click Contacts to see that vendor's contacts, and To-Do's to see any related tasks that have been created (you can right-click in the table and select Create New to generate your own). Notes are similar; right-click and select Add New. The final tab, Sent Email, displays just that. Links at the bottom of the screen let you Manage To-Do's and Run Reports.

Figure 3: You can add To-Do's for your individual vendors.

Manage Your Vendor Relationships

Your business relationships with vendors are critical right now, considering it may be hard to get all the supplies you need. QuickBooks can ensure that you have the information you need about them – information that is comprehensive and easy to access. It can also save you time and improve the accuracy and thoroughness of your transactions and reports. Please call if you need help with any element of vendor management or if you need assistance with your use of QuickBooks in other areas.