What is Tax Estimate and CP204 Form?
Understanding Estimated Tax
Estimated tax involves quarterly payments of taxes throughout the year, calculated based on the taxpayer’s reported income during each period. This requirement primarily affects individuals such as small business owners, freelancers, and independent contractors who don’t have taxes automatically deducted from their earnings, unlike regular employees.
This type of tax payment is applicable to various forms of income not subject to withholding, including earned income, dividend income, rental income, interest income, and capital gains. The Internal Revenue Service (IRS) mandates quarterly estimated tax payments for individuals with income outside the scope of automatic withholding. Subsequently, the taxpayer completes standard tax paperwork at the end of the year, settling any remaining balance or requesting a refund for overpaid amounts.
Income types not subject to withholding, and thus necessitating estimated tax payments, encompass dividends, taxable alimony, gains from stock sales, self-employment income, cash prizes and awards, interest income, and other forms of income lacking automatic withholding.
It is essential to note that various types of income fall outside the purview of withholding. Seeking guidance from a qualified accounting professional can assist in determining whether estimated tax payments are required for specific types of income received.
Understanding Estimated Tax Obligations
To determine if you are required to pay estimated taxes, it’s crucial to adhere to the IRS guidelines, which outline specific criteria. You may be obligated to make estimated tax payments if you fall into one or more of the following categories:
Determining the Tax Estimate Amount
To establish the tax estimate amount, a crucial step involves ensuring that the minimum amount does not fall below 85% of the tax estimate amount or the amended tax estimate amount from the previous year of assessment.
Minimum Amount of Tax Estimate
As per Subsection 107C (3) of the Income Tax Act (ITA), it is mandated that the minimum amount of tax estimate for a given year of assessment should not be less than 85% of the amendment of the tax estimate or the tax estimate amount (in cases where no amendment is submitted) for the immediate preceding year of assessment.
For entities such as companies, trust bodies, cooperatives, and Limited Liability Partnerships (LLPs), the determination of tax payable involves assessing the company’s estimated profit.
In situations where companies, trust bodies, cooperatives, and LLPs are newly established, the estimated tax payable for the initial year of assessment is determined based on the company’s estimated profit. This initial estimation serves as the foundation for calculating the estimated tax for the subsequent year of assessment.
Amending Estimated Tax Payable (Form CP204A)
Entities such as companies, cooperatives, trust bodies, and Limited Liability Partnerships (LLPs) have the provision to modify their tax estimates by submitting e-CP204A.
To amend the tax estimate amount, Form CP204A needs to be submitted. Amendments to Form CP204 for a given year of assessment can occur during the 6th or 9th month, or both, within the basis period for that assessment year:
If the amendment is made within the 6th month, the instalment of the amendment in effect may be selected starting from the 5th or 6th instalment.
If the amendment is made in the 9th month, the instalment of the amendment in effect can be selected starting from the 8th or 9th instalment.
Determination of the Amended Instalment Amount
Adjustments to the balance of the tax instalment payable after the amendment follow these principles:
If the amendment of the tax estimate surpasses the amount of instalments due, the remaining balance of the estimated tax payable must be settled in instalments according to the remaining number of instalments available.
If the amendment to the tax estimate is less than the amount of instalments that should have been paid, the termination of instalment payment for the following month can be executed.
Consequences of Non-Submission, Late Payment, or Underestimation of Tax Estimate (CP204)
Failure to submit CP204 incurs penalties, with fines ranging from RM 200 to RM 2000 or a potential imprisonment term not exceeding 6 months, or both.
Late payment of CP204 invites a 10% penalty on the outstanding tax balance for delinquent taxpayers.
Underestimating tax payable by more than 30% results in a 10% penalty on the underestimated amount.
Notification of Change of Accounting Period (Form CP204B)
Effective from the Year of Assessment 2019, subsection 21A (3A) of the Income Tax Act (ITA) mandates companies, cooperatives, trust bodies, and LLPs to notify the Director General of Inland Revenue (DGIR) about any changes in the accounting period using Form CP204B. The notification period depends on whether the accounting period is shortened or extended.
I. Shortened Accounting Period:
- Notify 30 days before the end of the new accounting period if it’s less than 12 months and closes before the original accounting period’s end.
II. Extended Accounting Period:
- Notify 30 days before the end of the new accounting period.
Enquiries
For any inquiries related to CP204/204A/204B, please contact the Tax Information And Record Management Section (Tax Operations Department) via email at anggarancukai@hasil.gov.my. More information can be found here.
Understanding CP204 And CP204A
CP204 is the designated form for submitting estimated tax payable, obligatory for trust bodies, cooperatives, and Limited Liability Partnerships (LLP) since 2019 via e-Filing.
CP204A, the adjustment form for CP204, allows entities to amend or revise the declared estimated tax payable from the original CP204 submission.
Obligation to Submit CP204 Payment
Every company, including limited liability partnerships, trust bodies, and cooperative societies, must determine and submit, using Form CP204, an estimate of their tax payable for a given year of assessment, 30 days before the commencement of the basis period.
Submission of Form CP204
The submission of tax estimates in Malaysia is a statutory requirement outlined in Section 107C of the Malaysian Income Tax Act, 1967. The initial submission employs Form CP204, and any subsequent revisions are facilitated through Form CP204A.
As per subsection 107C (7A) of the ITA:
Companies are mandated to submit Form CP204 through e-Filing from the Year of Assessment 2018.
Trust bodies, cooperatives, and Limited Liability Partnerships (LLPs) are obligated to submit Form CP204 through e-Filing from the Year of Assessment 2019.
When Should I Submit CP204?
Every company must determine and submit its estimated tax payable for a given year of assessment via Form CP204, no later than 30 days before the commencement of the basis period. This submission occurs 30 days before the start of the basis period for the respective assessment year.
For instance, if a company’s basis period is from 01.01.2021 to 31.12.2021, the CP204 submission deadline is November 2020.
Newly incorporated companies must submit the estimated tax payable within 3 months from the date of commencing business.
Small and Medium Enterprises (SMEs) are exempt from providing tax estimates or making instalment payments for the first 2 years starting from the year of assessment in which the SME commences operations.
Monthly instalments of the estimated tax are due no later than the 15th day of each month.
How To Pay CP204?
Online FPX Service
Taxpayers can utilize the e-payment portal on the IRBM website, enabling income tax payment through the FPX gateway. Users need to register for internet banking services with any commercial banks listed as FPX associates.
Payment can be made online at the ByrHASiL portal.
Credit Card / Debit Card
As of October 1, 2022, IRBM has temporarily suspended credit card payments on the ByrHASiL portal. Credit card payments can still be made at PPTH KL, PPTH Kuching, and PPTH Kota Kinabalu, incurring an Administration Charge of 0.8%.
Payment by Post / Courier
Starting January 1, 2021, IRBM no longer accepts income tax payments via cheques sent by post or courier. This policy shift aims to promote the use of IRBM-provided e-payment methods and eliminate issues associated with bounced or dishonoured cheques.
Submission Period of e-CP204 Form
Company in Operation:
As per subsection 107C (2) of the ITA 1967, companies, cooperatives, trust bodies, and LLPs in operation must submit e-CP204 no later than 30 days before the commencement of the basis period for a given year of assessment.
New Companies Operating:
According to paragraph 107C (4) (a) of the ITA 1967, newly operating companies, cooperatives, trust bodies, and LLPs with a first basis period of not less than six (6) months must submit e-CP204 within three (3) months from the date of commencing operations.
IRS Guidelines for Making Estimated Tax Payments
According to the IRS, individuals should initiate estimated tax payments if they:
Anticipate owing a minimum of $1,000 in taxes after deducting withholding tax and credits,
Project that their withholding tax won’t reach 90% of the total tax liability for the tax year, OR
Foresee their income tax withholding falling short of covering 100% of the tax liability from the previous tax year.
If you plan to file as a sole proprietor, partner, S corporation owner, shareholder, or self-employed individual, making estimated quarterly tax payments is likely necessary if you expect to owe $1,000 or more in taxes.
For corporations, the norm is to make estimated tax payments if an expected tax liability of $500 or more for the year is anticipated.
Conclusion:
In navigating the complex terrain of taxation, the importance of adhering to IRS guidelines on estimated tax payments becomes evident. Whether individuals find themselves in the realm of self-employment or corporations projecting substantial tax liabilities, the obligation to make timely and accurate estimated payments stands paramount. By comprehending the criteria outlined by the IRS, taxpayers can proactively manage their financial responsibilities, ensuring compliance and avoiding penalties. This article serves as a roadmap, empowering individuals and businesses alike to navigate the intricate path of estimated tax payments with clarity and confidence.
Frequently Asked Questions (FAQs)
When are estimated tax payments due?
Estimated tax payments are generally due quarterly, with specific deadlines falling in April, June, September, and January.
Who needs to make estimated tax payments?
Individuals and businesses expecting to owe $1,000 or more in taxes and facing specific withholding criteria outlined by the IRS.
Can I make estimated tax payments online?
Yes, the IRS provides online payment options, including the Electronic Federal Tax Payment System (EFTPS) and credit/debit card payments.
How is the amount for estimated tax determined?
The estimated tax amount is often based on the expected annual income, deductions, and credits for the tax year.
What happens if I underestimate my tax payments?
Underestimating may result in penalties, but exceptions exist for certain taxpayers and circumstances.
Do I need to make estimated tax payments if I am self-employed?
Yes, self-employed individuals, as well as sole proprietors, partners, and S corporation owners, often need to make estimated quarterly tax payments.
Can I adjust my estimated tax payments during the year?
Yes, adjustments can be made by filing Form 1040-ES or amending previous payments using Form 1040-X.
Is there a penalty for late estimated tax payments?
Yes, a penalty may apply for late payments, but exceptions exist for reasonable causes.
Are there exemptions for small businesses?
Small and new businesses may be exempt from estimated tax payments for the first year or enjoy reduced penalties.
Can corporations be exempt from making estimated tax payments?
Corporations are generally required to make estimated tax payments if they anticipate owing $500 or more in taxes for the year.
