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Size up your ’16 tax liability

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in Small Business Tax

If you fail to pay enough tax during the year through withholding and quarterly installments, you’ll owe an interest charge penalty on top of the regular tax bill.

Strategy: Rely on IRS-approved exceptions to avoid the penalty. If you qualify for any one of three exceptions, you’re off the hook for the penalty.

Specifically, no penalty is imposed if you:

  • Pay at least 90% of your current year’s tax liability
  • Pay at least 100% of your 2015 tax liability (110% if your 2015 AGI exceeded $150,000)
  • Pay at least 90%, based on your 2016 “annualized income.”

The last method often works best for individuals whose income is received on a seasonal basis, such as building contractors, landscapers, and retail business owners.

Tip: The easiest way to avoid a penalty is to pay the tax based on 100% (or 110%) of last year’s liability—you already know for sure what that is.

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