Self-employed individuals often encounter the challenge of tracking and paying taxes throughout the year. While self-employment offers benefits like flexible schedules, it also brings unique tax challenges. Mastering the process of making estimated tax payments is crucial for managing these challenges and maintaining compliance with tax obligations.
**Key Takeaways**
For self-employed individuals, estimating and remitting taxes is an essential skill. The Internal Revenue Service (IRS) requires these taxes to be paid quarterly, but the flexibility exists to make payments more frequently—weekly, bi-weekly, or monthly—to ensure the total amount due is paid by the end of each quarter.
Failure to meet these requirements and deadlines can result in penalties and interest charges. Additionally, the requirement to make estimated payments applies not only to the self-employed but also to individuals who earn income not subject to withholding, such as interest, dividends, and taxable alimony.
**Why You Should Make Estimated Tax Payments**
Taxes on income must be paid throughout the year, even though tax returns are filed annually. Employees typically meet this requirement through tax withholdings by their employers. However, self-employed individuals and others who earn income not subject to withholding must make estimated tax payments if they expect to owe at least $1,000 in taxes for the year.
Neglecting to make your required estimated tax payments can lead to a large tax bill when filing your tax return, potentially causing financial hardship or even bankruptcy. You can avoid penalties if your withholdings and payments equal at least 90% of this year’s total tax or 100% of last year’s tax (110% if your adjusted gross income exceeds $75,000 for singles or $150,000 for joint filers).
To prevent negative outcomes, the government requires individuals with non-withheld income to estimate and pay their taxes periodically throughout the year. The IRS provides resources and guidelines to assist in calculating and submitting these payments. If you delay your first estimated tax payment beyond the typical April 15 deadline, you should make payments as soon as possible to minimize penalties.
**How to Make Estimated Tax Payments**
To make estimated tax payments, you must first determine your anticipated tax liability, using your prior year’s income as a reference point and adjusting based on current earnings and any relevant credits or deductions that might apply. Your income could rise or fall during the remainder of the year.
For example, a gig worker who typically works four hours a day doing deliveries can estimate their tax based on that workload, adjusting their future payments if their hours change. If they decide later to work fewer hours, they would then update their estimate the next time they file.
Understanding when to make estimated tax payments is crucial, as these deadlines are set by the Internal Revenue Service (IRS). Here are the key deadlines for 2024:
– For income earned from January 1 through March 31, the payment is due on April 15.
– For income earned from April 1 through May 31, the payment is due on June 17.
– For income earned from June 1 through August 31, the payment is due on September 16.
– For income earned from September 1 through December 31, the payment is due on January 15 of the following year.
The IRS updates this schedule annually, and it’s important to note that the payment periods are not all equal in length. For instance, the period for the payment due on June 17 covers only two months, while the one due on April 15 spans three months. Always refer to the IRS-specified payment dates, and remember that if a payment date falls on a weekend or holiday, the deadline shifts to the next business day.
The process of calculating your taxes is detailed in Form 1040-ES, Estimated Tax for Individuals. This form is specifically designed for self-employed individuals and includes payment deadlines, access to government support hotlines, and information on special exemptions. It also contains a worksheet for a detailed calculation of taxes, taking into account any relevant income tax deductions or credits.
Calculating your taxes is generally straightforward if you maintain accurate records of your income and expenses, potentially with the aid of accounting software. If your records are disorganized, consider hiring an accountant or bookkeeper to ensure your income is calculated correctly. Plan ahead to avoid missing any filing deadlines.
Once you have determined your income and estimated your tax liability, the IRS offers several payment methods, which are outlined on Form 1040-ES. These include online payments through your IRS Online Account, by check, over the phone, via credit card, and through online banking portals. There is also a mobile application called IRS2Go with its own payment options.
If you struggle to afford the estimated tax payments, the IRS offers options like payment plans, extensions, or potentially tax forgiveness. While approval isn’t guaranteed, consistently making payments can improve your chances of favorable consideration from the IRS. Keep in mind that you may have to pay a penalty if you don’t pay enough tax through withholding and estimated tax payments, and late estimated tax payments can result in penalties, even if you ultimately receive a refund when you file your tax return.
In addition to managing estimated tax payments, self-employed individuals should also plan for other financial commitments.
To calculate your estimated taxes, start with your total tax liability from the previous year as a baseline. Adjust this amount considering changes in your income and new tax credits you may qualify for. The IRS Form 1040-ES has a comprehensive worksheet for this process. You can also use tax preparation software or seek professional help for accurate calculations.
If your income changes during the year, you can adjust your estimate in the next quarter to correct for underpayment or overpayment. For instance, if you underestimated in the first quarter, increase your payment in the second quarter. Estimated tax payments aren’t only for self-employed. If you get a large portion of income from sources not subject to withholding taxes like dividends or interest income, you may need to make these payments. Form 1040-ES provides guidelines to determine if you’re required to pay. Being self-employed has rewards but also requires following guidelines and using resources like IRS Form 1040-ES to accurately estimate and pay taxes. Seek advice from a tax advisor when needed to stay compliant with tax laws. Although individual circumstances vary, it may be wise to allocate a portion of your income to retirement savings, life insurance, or long-term financial goals like buying a house or paying for college. There are many helpful resources, from free online educational resources to professional financial planners.