Quarterly taxes don’t have to be confusing
Many people experience job changes and large income fluctuations. Often, this has meant facing unfamiliar federal income tax requirements, such as assessed taxes, that can confuse newly self-employed people. Here are some tips to help taxpayers avoid mistakes that lead to penalties and interest.
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Generally, anyone who owes more than $1,000 in a given tax year, after subtracting withholding and refundable credits, must pay estimated taxes quarterly. Traditionally, this applies to taxpayers with higher incomes due to revenue from sources such as interest, dividends, or rent.
Salaried individuals who are paid by the hour do not usually pay assessed taxes. Their federal income taxes are withheld from their wages throughout the year by their employers.
However, self-employed individuals are solely responsible for ensuring that their federal income taxes are paid in a timely manner.
how to pay
The IRS requires individuals to estimate the total income tax for the year and divide it into four equal installments. Installments must be paid on:
- April 15
- June 15
- September 15
- January 15
Unless the 15th falls on a weekend or a federal holiday, in which case the due date becomes the first business day after the 15th.
To avoid fines, the payment—by check or money order accompanied by an IRS slip—must be stamped by the due date. Or online payments can be made without a coupon.
For example, if you miss one day, you will get a penalty. If you are out of the country and your flight is delayed by one day… and you miss the deadline, you will be penalized.
When you try to estimate your income tax for next year, you are predicting the future. If you underestimate yourself, you may be penalized for the number of days you remain unpaid. The simple way to make sure you pay what you owe is to pay at least 100% of the tax you paid in the previous year unless you have any indication that you will earn much less.
If you think you will make less, calculate the amount and try to pay 90%. If you pay 90% and still owe more at the end of the year, that’s okay.
There is a “safe harbor payment” – a payment that ensures that you will not be penalized. For example:
- If you’re married, and you partner together and your adjusted gross income is less than $150,000, you can make a payment equal to 100% of what you paid in income taxes in the previous year or 90% of the tax you estimate for the current year.
- Taxpayers with adjusted gross income of $150,000 or more must make a payment equal to 110% of the previous year’s taxes or 90% of the tax for the current year.
Either way, you’ll still owe taxes at the end of the year, but you won’t face fines and interest.
The IRS provides a worksheet for Form 1040 ES. It guides taxpayers on how to estimate their taxes.
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Don’t delay it
The potential penalties and benefits for missed payments may be bad, but they are nothing compared to not preparing for a tax bill at the end of the year. Recalculate your estimated taxes in the middle of the year to see where you stand.
Whatever amount you estimate you will owe for the year, you should pay it early in the year and get it out of the way. Consider 25% for the first payment and 50% for the second payment so that a large portion of the debt is dealt with up front or before a business downturn occurs.
If you need to, you can make payments and withdrawals at the end of the year, such as buying work equipment or delaying bills until the new year.
The Internal Revenue Service allows estimated quarterly taxes to be paid with a credit or debit card, which is a convenient way to pay during the year. Card payments can be made over the phone, online, or upon electronic filing. Benefits include:
- Notarized proof of payment (a confirmation number is issued to the taxpayer and “US Treasury tax payment” is included on the card statement); And the
- Delay in paying out-of-pocket costs and, in the case of enrolling in such a program, accumulating miles, points, rewards or refunding from the credit card issuer.
The IRS uses merchant service providers to accept card payments. According to the IRS, neither he nor those providers store card numbers. Providers typically charge a convenience fee, which appears on the card statement as a “tax-paying convenience fee.”
Taxpayers may also choose to use the Federal Electronic Tax Payment System, which will disburse funds from a pre-set account after a phone call or online order.
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