Question: Is there anything wrong with getting a big income tax refund every year?
Answer: Yes, it means you’re giving the IRS an interest-free loan when you could have the use of that money during the year to invest for yourself. As early as possible each year, you should take the time to estimate your total tax bill for that year. Consider adjusting your withholding so that the amount your employer withholds comes closer to what you will actually owe on your tax return. You can change your withholding at any time during the year by giving a new Form W-4 to your employer.
Question: What is backup withholding?
Answer: Banks and other businesses that pay you interest, dividends, rent, or for services you render as an independent contractor may be required to withhold income taxes from the checks they give you.
You will be subject to backup withholding if:
1) You fail to provide the business paying you with your correct taxpayer identification number when they request it.
2) The IRS notifies the payer to start backup withholding because you failed to report all of your interest and dividend income on your tax return.
Question: Who has to make estimated tax payments?
Answer: If you have income from which no income tax is withheld (such as business income), you may be required to make quarterly estimated tax payments. Also, if you don’t have enough income taxes withheld from wages and pensions to cover your tax liability, you may need to make estimated tax payments.
Federal estimated taxes for individuals are paid with Form 1040-ES and are due on April 15, June 15, September 15 of the tax year involved and on January 15 of the following year.
If this is your first year with self-employment income or increased interest and dividend income, review your requirements for quarterly estimates to avoid being penalized by the IRS.