If taxes aren't due until April 15th, why do I have to pay the IRS throughout the year?
Answer:
Actually, you are only required to pay 90% of your prior year's tax liability during the tax year to assure not receiving a penalty for not paying enough estimated tax. So if you are expecting a large increase in income you really need only assure that you have that amount paid in throughout the year that you are receiving that increase and you can invest the balance until the Due Date of your return.
Because the government needs money to operate through out the year. If no one paid any taxes until April 15th, then the government would run out of money. Not like they are great money managers you know.
It's a pay as you go system (that's the rule). Withholding is taken from each check so that the taxes are hopefully paid as you receive the income.
If you don't have taxes withheld (i.e. you are self employed) you have to send them in quarterly.
If you don't send in enough during the year, or it is received late, you will have to pay interest & penalties (more $$).
They want it as you earn income (time value of money).
The government needs money to pay me every day of the year. Your final report for the preceding year is not due until the following April. But they needed the money. I do not really file reliably so they keep all of mine.
I am self-employed in Canada, and I am forced to give up quarterly installments throughtout the year. On March 15th 2006, the first installment was due - more than a year before it is supposedly legally due (April 30th 2007). This is because the government doesn't trust me to keep enough money saved up to pay my taxes next year.
So I can't use a high-interest savings account such as ING Direct to put my money for taxes in, and I lose that interest to the government.
Nope, it doesn't make sense.
Jeff C - that doesn't make sense, either. What about the money from the year before?
Because they don't trust their own citizens.
Cause they need money throughout the year not just at tax time.
Your tax RETURN (or annual reconcilliation) is due April 15th. Your taxes are due as the money is earned (withholding statute) or quarterly if self-employed.
When you fill out a W-4 you can take any number of allowances from tax withholding. The more allowances you take, the less they withhold. If you can have no withholding, you can invest the money like you said, and in-turn pay less on taxes. Financially, this is the smartest thing to do.
Unfortunately, the government wants to make sure its going to get at least some of its money, so it instituted the withholding laws. If you are already working, ask your HR department for a new W-4, and try to get as many allowances as possible. To check what you qualify for look here:
http://www.irs.gov/pub/irs-pdf/fw4.pdf.
Taxes aren't due April 15th. They are due as you earn the money. Taxes on income from which no taxes are withheld are supposed to be paid quarterly. You can be charged penalties if you don't pay enough each quarter, even if you pay the full amount before April 15th.
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