Self-employed individuals must turn in quarterly anticipated tax payments since tax is not deducted from their paychecks as it is for employees. However, determining the amount to pay might be difficult if your income changes from month to month or year to year. You don’t want to send in so much that you can’t cover other bills, or so little that you are hit with a hefty tax bill when it’s time to file your taxes, not to mention underpayment penalties.
The following guidelines will assist you in calculating your quarterly anticipated tax payments in order to avoid fines or going over budget.
- Individuals who work for themselves must make estimated tax payments at the end of each quarter.
- Making sure your taxes are properly reported can save you from overpaying, underpaying and getting a hefty tax bill, or suffering penalties.
- Set up separate bank and credit card accounts for your company. This will make tracking your company spending and revenue much easier.
- File your quarterly payments and, if possible, overpay somewhat. It will be returned to you.
- Get counsel from a self-employed acquaintance, an accountant, or the IRS hotline throughout the first year.
1. Base Your Payments on Last Year’s Earnings
You may avoid a penalty by paying at least the same amount in taxes as the previous year if you were self-employed at the time. The entire taxes you paid may be seen on last year’s tax return. Simply split last year’s taxes into four equal installments and submit them in by the IRS’s quarterly due dates of April 15, June 15, September 15, and January 15.
If you live in a state that has experienced a natural catastrophe, the government may have extended your tax filing deadlines. You may check IRS disaster relief notifications to see whether you are eligible.
If your taxes are greater this year than previous, you will still be accountable for what you owe, but you will not be penalized for underpayment. Assume you paid $4,000 in taxes last year, for example. This year, you send in four $1,000 payments. You figure your taxes will be $5,500 at the end of the year. You may avoid incurring a penalty by sending the IRS a cheque for the $1,500 difference during tax season.
You should be aware that if you have no tax due the previous year, you will not be penalized for failing to make any payments prior to the filing deadline. You may select how much to pay in during the year, but be aware that failing to send in enough may result in a high tax bill at the end of the year.
2. Get Advice the First Year
Talk to a self-employed friend or engage an accountant to manage your tax computations throughout your first year of self-employment. In any case, you may work out how much to pay, what costs you can deduct, and get acquainted with the procedure.
3. Use Separate Accounts for Business Expenses
If you create a separate bank account and a credit card account for business costs exclusively, you will simplify your life and make it simpler to predict your quarterly taxes.
These keep track of your company spending for simple reference throughout tax season. It’s far easier to look back through if you have a query about spending than sifting through a pile of paper receipts while preparing your taxes.
4. Keep a Running Tally of Your Income
If you don’t maintain a continuous track of your income and pay your anticipated tax on time, you could be surprised next April. Calculate your income at the end of each quarter and use it to decide whether to raise or decrease your quarterly payments.
If you utilize a separate checking account for company income deposits, a running tally will only take a few minutes to enter into your online banking records.
5. Use the IRS 1040-ES Worksheet
If your income changes much from year to year, the IRS 1040-ES worksheet is the easiest approach to estimate your quarterly payments. The worksheet walks you through estimating your projected tax payment and considers various typical deductions you may be eligible to claim.
You may fill out the spreadsheet every quarter, or at least every quarter when your income changes in an unexpected way. If your company’s revenue varies significantly from quarter to quarter, you’ll need to change your projected tax payment to prevent a major surprise next April.
6. Always Overestimate, at Least a Little
Tax penalties may be expensive, depending on how much you underpaid your taxes. There is a fine for falling short, which is usually about. 5% of the tax due for each month or portion of a month in which the tax is not paid. In addition, from the day your quarterly payment is due until the day it is paid, interest is imposed on the amount you underpay.
The interest rate on individual taxpayer underpayments is 4% in Q2 2022.
The IRS sets the interest rate for individual taxpayers each quarter, based on the federal short-term funds rate plus three percentage points. As a result, if you underpay in the first quarter of a tax year, you may face a different penalty than if you underpay in the third quarter.
If you’re not sure how much to pay each quarter, slightly overestimate your taxes. You will not lose money in the long run. You’ll just get it as a tax return.
7. Put the IRS Tax Help Line on Speed Dial
The IRS’s free hotline is the best place to get answers to any questions you may have. Individual taxpayers should call 800-829-1040.
You are your own accounting department until you pay someone to handle your taxes for you. Unless you are an accountant, you will almost certainly have some queries, at least during your first year of self-employment.
What Is the Self-Employment Tax Penalty?
The self-employment tax penalty for late filing is. 5% of the outstanding amount for each month or portion of a month in which the tax is not paid. If you owe taxes, the underpayment rate is 4% as of Q2 2022.
What Happens If You Don’t Report Self-Employment Income?
It is a severe problem and a federal and state felony to fail to record self-employment income. This is an example of tax avoidance. You may be charged a fine, interest will be assessed on the amount not paid, and you may be jailed and imprisoned for failing to pay your taxes.
How Do I Avoid Paying Taxes if I’m Self Employed?
If you are self-employed, you cannot avoid paying taxes; the best you can do is lower your tax burden. You may do this by increasing your company costs, which are tax-deductible. Many costs, including as office equipment, phone bills, automobile fuel, continuing education, and others, are considered valid by the IRS.
The Bottom Line
If you are self-employed, you must exercise extreme caution while calculating and paying your anticipated taxes in order to avoid underpayment penalties. If you use the recommendations above to calculate your quarterly anticipated tax payments, you may reduce your chances of incurring penalties and interest—all while staying within your budget. If you have issues about your personal tax position, always contact with a tax adviser.
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