Tax season is upon us, and for those of us who are self-employed or have side hustles, it also means time to pay estimated taxes. While the concept of paying taxes may seem straightforward, estimated taxes can be a bit confusing. So let’s break it down.
Estimated taxes are quarterly payments made to the IRS by individuals who receive income that is not subject to withholding tax. This includes self-employment income, freelance work, rental income, and other sources of income that aren’t automatically taxed by an employer.
So why do we need to make these payments? Well, since this type of income isn’t subject to withholding tax like traditional employment wages are, taxpayers are responsible for ensuring they’re still paying their fair share in taxes throughout the year. If you wait until April 15th to pay all your taxes at once instead of making quarterly estimated payments throughout the year on your non-withheld earnings, you could face penalties for underpayment.
How do you calculate how much you owe? The IRS provides worksheets and calculators online that can help estimate your tax liability based on your expected annual earnings from non-withheld sources. You’ll then divide that number into four equal payments due in April, June, September and January (of the following year).
But what if your earnings fluctuate throughout the year? That’s where it gets a bit more complicated. If your projected annual earnings increase or decrease significantly during any given quarter compared with previous quarters in the same calendar year (i.e., if you earn significantly more money in Q3 than Q1), then you should adjust subsequent quarterly payments accordingly so that they reflect current projections.
It’s important to note that there are some exceptions when it comes to estimated tax payments – most notably if you expect your owed tax liability will be less than $1,000 for the entire calendar year after subtracting any credits or withholdings – but generally speaking if you earn money outside traditional employment, you should be prepared to make quarterly estimated payments.
So while paying estimated taxes may seem like just another burden on top of an already complicated tax system, it’s important to stay on top of your payments to avoid penalties and ensure you’re doing your part to contribute to the country we all call home.