Many of us may already know where taxes go and why our government collects all applicable taxes. Needless to say, taxes are essential for keeping our society functioning properly and developing smoothly. Many countries need taxes as the main source of revenue for funding important public expenditures and projects such as health care, education, social programs, infrastructure, and public transport. As law-abiding citizens, we have the responsibility to properly file and pay our taxes. Basic knowledge about the taxation system of our country is essential for proper and smooth tax payment.
Here, we’ll share some important concepts for us, as taxpayers, to have a better understanding of how tax payment works and appreciate our taxation system.
Filing Your Taxes
Assessing your current financial situation is the first step to filing your taxes. Federal taxes and state taxes are two different types of taxes that are likely to be applicable or not applicable to you based on your income level and other factors. Federal withholding tax is based on federal taxable dollars, while state withholding tax works on the state-level taxable income.
For employees, much of the tax filing load is shouldered by the employer. They just need to fill out the W-4 form and provide their basic personal information, including the number of dependents and marital status. The employers will then determine the withholding based on the applicable tax guidelines and the wage amounts earned in a certain pay period.
Let’s say you owe the government $10,000 for the year and you get paid bi-weekly or every two weeks. $384.62 will be deducted from each of your paychecks and your employer will forward the tax payment. The deduction is computed as $10,000 divided by 26 (number of bi-weekly periods in a year).
Tax filing as a self-employed individual or as a small business owner can be a bit complicated. Both federal and state taxes may apply to your taxpayer status, depending on whether you meet the applicable taxation criteria and guidelines. Instead of paying based on the pay period, a quarterly schedule of tax payment is set for self-employed individuals. Using an estimated tax payments calculator is a big advantage in paying the right quarterly tax and staying on top of your taxes. Instead of manually calculating the federal and state taxes and risking getting the incorrect tax amount, a tax payment calculator uses the latest federal and state-level tax brackets and updated standard deductions. Not only does it help you steer clear of costly penalties, but it also helps find tax write-offs from your purchases to help increase your savings.
Paying Your Taxes
Thanks to modern technology and the expanding payment options provided by the IRS, paying your taxes has become more convenient. Employees have their tax payments automatically withheld by their employers. For self-employed individuals and corporate entities, the payment process is different, but there are several options available for fast and efficient payment.
Electronic Funds Withdrawal
One of the convenient payment methods offered by the IRS is through electronic funds withdrawal (EFW). When you file your federal taxes through a tax professional, through using tax software, or through a tax filing product, you can opt for this payment option. You just need to send a payment request for direct debit from your bank account. Also, you need to make sure that the payment or debit schedule falls on or before the tax deadline. It offers the advantages of secure and safe transactions and savings by avoiding extra fees from the IRS.
For those paying quarterly taxes, the direct pay option is the most common choice for self-employed taxpayers. In this option, the tax payment comes directly from your checking or savings account at no extra cost from the IRS. This method of payment is secure and convenient, and you can also benefit from signing up for email notification regarding your tax payment. You can receive helpful tax tips, tax updates, and confirmation of your payment transaction where you will be given a confirmation number for easy tracking of your payments.
This straightforward method of payment is also available if you cannot obtain a bank account for some reason. While many people consider this an outdated method of payment, the IRS has made adjustments to make it easier by allowing you to send you cash payment through a participating retail partner. The processing of the payment typically takes 5 to 7 business days so be sure to pay at least 7 days ahead to ensure a timely posting of your cash payment.
Installment agreements can be offered by the IRS if you cannot pay all your taxes on time or within 120 days. You can opt for a Direct Debit Installment Agreement (DDIA), and make automatic monthly payments through your checking account. Applying for DDIA online only costs $31 for the setup fee compared to a $107 fee from other modes of application. Also, note that accrued penalties and interests are included in the debit transaction until the balance becomes fully paid.
Another option is to apply for a long-term payment plan, with direct pay (for individual taxpayers), Electronic Federal Tax Payment System (EFTPS) (requires enrollment), or monthly payment (through credit/debit card, money order, or check) as your payment options. The online application is still the cheaper alternative, with a $149 setup fee, compared to a $225 fee for phone, mail, or an in-person application. Accrued penalties and interests are also applied until the balance becomes fully paid.
Knowing your tax bracket, your taxation status, your federal and state obligations, and your filing options are just a few important items you need to know and apply. By knowing these essential factors, you also get to appreciate how tax payment works. There can be certain situations and qualifications that warrant the payment of taxes, and knowing them can help make your payments efficient and minimize or eliminate costly errors and penalties.