How to Make Estimated Tax Payments

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How to Make Estimated Tax Payments

One issue that self-employed persons often face is effectively monitoring and remitting their taxes throughout the year. Despite the fact that self-employment may be a highly fulfilling experience, allowing you to manage your own time, pursue ambitious objectives, and create job prospects, it can also present a number of obstacles.

Learning how to make approximated tax payments will help you handle one of those issues and keep on top of your taxes.

Key Takaways

  • Knowing how to estimate and remit your taxes throughout the year is a vital skill for self-employed persons.
  • These must be paid quarterly in accordance with the Internal Revenue Service’s schedule (IRS).
  • Failure to do so may result in interest and penalties, and the duty to make projected payments may apply to those who are not self-employed in certain cases.

Why You Should Make Estimated Tax Payments

Even though we only submit our tax returns once a year, we must pay taxes on our income throughout the year. Employees achieve this via withholding taxes that their employers remit on their behalf. However, self-employed individuals must estimate and remit their own tax payments.

Technically, anybody who anticipates to owe at least $1,000 in taxes by the time they file their yearly tax return from sources that are not subject to withholding taxes must make anticipated tax payments throughout the year. Interest, dividends, and taxable alimony payments are examples of income streams that are not subject to withholding taxes.

If you are obligated to make estimated tax payments, it is critical that you do so. Otherwise, you run the chance of receiving a big tax bill all at once after filing your tax return. Most individuals cannot afford to pay their whole tax due at once, and being required to do so may drive them into debt or bankruptcy. In order to prevent this, the government compels all self-employed individuals to estimate and remit their tax payments throughout the year. Fortunately, the government offers materials and recommendations to help you through the procedure.

How to Make Estimated Tax Payments

The first step in making anticipated tax payments is determining how much you owe. It is a “estimated” tax payment since you do not know what your tax bill will be at the end of the year. After all, your earnings might fluctuate during the rest of the year. As a result, self-employed individuals will often start with their prior year’s income and then do their best to estimate their income tax based on their current rate of earnings and any credits or deductions that may apply.

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For example, if a gig worker spends four hours a day doing deliveries, they may predict their revenue and tax burden based on the same effort. If they subsequently decide to work fewer hours, they will alter their estimate the next time they submit.

The Internal Revenue Service specifies when you must submit your anticipated tax payments (IRS).The following payments are due in 2022:

When to Make Estimated Tax Payments
Payment Due DateFor Income Earned During…
April 18Jan. 1 through March 31
June 15April 1 through May 31
Sept. 15June 1 through Aug. 31
Jan. 17 of next yearSept. 1 through Dec. 31

Even though the payments are typically referred to as quarterly payments, the periods covered are not equal quarters. The period covered by the June 15 payment date, for example, is just two months long, but the period covered by the April 18 payment date is three months long. As a result, it is critical to refer to the IRS payment dates rather than merely utilizing your own calendar. If the payments fall on a weekend or holiday, the payment deadline will be extended to the next working day.

Form 1040-ES, Estimated Tax for Individuals, describes the technique for computing your taxes. This form, as the name indicates, offers all of the information required for self-employed individuals to estimate their taxes, as well as supplementary information such as payment deadlines, government help hotlines, and special exemptions. The form also contains a thorough worksheet that self-employed individuals may use to compute their taxes line by line while taking any available income tax deductions or credits into account.

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This estimate is often simple if you have maintained precise records of your income and spending, such as by utilizing accounting software. If your records are chaotic, you may need to engage an accountant or bookkeeper to assist you correctly calculate your revenue. If this is the case, be sure to prepare ahead of time and provide enough time to avoid missing deadlines.

There are several payment options available after you have assessed your income and estimated your tax bill. The IRS offers many payment options, which are shown on Form 1040-ES. These options include paying via your IRS Online Account, by check, over the phone, with a credit card, or through an online banking connection. IRS2Go, a mobile application, even has its own payment alternatives.

What Happens If You Can’t Afford to Pay the Estimated Amount?

In general, it’s a good idea to pay as much as you can, even if you can’t pay the whole amount you believe you owe. After all, you don’t want to be compelled to pay a significant sum at the end of the year after completing your yearly tax return, when you may not have saved enough money to satisfy the lump-sum tax obligation. You may reduce this risk by paying as much as you can throughout the year.

If you do find yourself struggling to fulfill your tax obligations, you may seek assistance from the IRS in the form of a payment plan, an extension of your payment deadline, or even complete or partial forgiveness of your taxes owing. Although there is no certainty that the IRS would grant these requests, having a track record of prompt and regular payments will make it simpler for the IRS to contemplate doing so.

Special Considerations

In addition to keeping up with expected tax payments, self-employed individuals should prepare ahead of time for other financial obligations. Although individual circumstances may differ, it may be prudent to set aside a percentage of your monthly income for retirement savings, life insurance, or longer-term financial objectives such as home ownership or college tuition. There are several resources available to assist with this endeavor, ranging from free internet educational tools to professional financial planners.

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How do I calculate estimated taxes?

One popular method for computing projected taxes is to start with your prior year’s total tax due as a baseline, then modify it higher or lower based on whether your income is rising or decreasing. Other considerations, such as whether you are eligible for new tax credits, must also be evaluated. The Internal Revenue Service (IRS) Form 1040-ES includes a thorough worksheet that walks you through the process of computing your estimated taxes. You may also utilize tax preparation software or seek expert help.

What happens if my income changes during the year?

If your income changes throughout the year and you discover that your earlier estimates were incorrect, just modify your estimate in your next quarterly report. For example, if you underreported in the first quarter, you might adjust your estimate in the second quarter to compensate for the first deficit. At the end of the day, projected taxes will always depart from your real tax due in some manner, so these types of changes are usual.

Are estimated tax payments only relevant if you are self-employed?

No, even if you are not self-employed, you may be required to make anticipated tax payments. This may happen if you get a significant amount of your overall income from sources that are not subject to withholding taxes, such as dividends or interest income. Form 1040-ES gives complete and up-to-date rules for determining if you are needed to pay anticipated taxes.

The Bottom Line

Although there is a learning curve, working for yourself can be a tremendously gratifying experience, both emotionally and financially. Developing good habits when it comes to taxes and other financial obligations is a terrific way to get the most of what self-employment has to offer.

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