To avoid fines and interest, you must make an estimated tax payment every quarter, whether you operate a business or work as a freelancer. Here's how to do it. Because most people are paid on a salary, their employer deducts income tax. However, there is generally no automatic withholding option for millions of taxpayers who are self-employed or have significant non-wage income. Quarterly estimated tax payments will be required for these taxpayers. It's not always easy to figure out your file quarterly taxes payments, but it's crucial. If you avoid them, you will have to pay a big penalty when it comes time to file your taxes.
What Are Quarterly Taxes and How Do They Work?
Quarterly taxes, also known as estimated taxes, are how self-employed people must pay their taxes to the IRS throughout the year if their earnings are above a specific threshold. So, depending on your self-employed income, you may have not one but four Tax Days during the year. These four tax payments are made every three months for Social Security, Medicare, and your income tax. The two types of taxes to be aware of are:
Self-employment tax: This tax is normally 15.3% of your self-employed income, and it combines your Medicare and Social Security contributions into a single tax. 1 If you work for a salary, your employer will split the expense of those taxes with you. However, when you are in business for yourself, you are in charge of everything.
Income tax: You will pay taxes on your earnings at the same rate as everyone else. If you are self-employed, you recommend setting away roughly 25–30 percent of each pay check for taxes. You won't be surprised by a large tax bill when it's time to pay.
File quarterly taxes
The deadlines for file quarterly taxes are as follows:
April 15th
June 15th
The 15th of September
The 15th of January
Three of the year's payments are made in the same calendar year, while the last payment is not made until January. Imagine you are forced to make four $4,000 payments every quarter. However, you owe $3,000 in back taxes from the prior year. You can choose to apply your refund to your first tax estimate. As a result, your first tax estimate, payable on April 15th, will be reduced to $1,000. It's even feasible to apply an overpayment to several estimates. For example, take a $10,000 overpayment from the prior year. You can put $4,000 toward each of the first two estimates and $2,000 toward the third estimate.
You can even spread the overpayment evenly between all four estimations. Every four instalments can be reduced by $1,000 with a $4,000 overpayment.
Best way to pay estimated quarterly taxes
IRS Form 1040-ES can be used to mail your file quarterly taxes payments. You can also pay electronically through the IRS's Direct Pay system or the US Treasury's Electronic Federal Tax Payment System. A fee of roughly 2% is charged when paying with a credit card.
You can even pay with cash at some IRS major retailers.
Bottom line
Self-employment might provide you with more flexibility and excitement in your professional life. It does, however, come with certain financial and tax obligations, such as deciding which taxes you must pay, the amounts owed based on your income level and occupation, and making quarterly payments on time. Seek the advice of a tax specialist if you need additional assurance about your quarterly tax payments.
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