If you receive a regular salary from a business in the United States, your employer likely withholds income tax from every paycheck. But suppose you are among the millions of small business owners, freelancers, concert workers, and other self-employed taxpayers. In this case, there is no automatic mechanism to withhold your taxes throughout the year.
While the estimated tax return process is a bit more complicated, the IRS has a method to help you avoid paying a huge bill on tax day. Here’s everything you need to know about estimated taxes.
What are the estimated taxes?
If you earn or receive income that is not subject to federal withholding taxes throughout the year – ancillary income or income from a rental property, for example – you will pay as you go with estimated taxes. . Estimated tax is a quarterly payment based on your income for the period. Essentially, estimated tax allows you to prepay a portion of your income tax every few months to avoid paying a lump sum on tax day.
Who should pay the estimated taxes?
If you’ve completed IRS Form W-4, which provides instructions to your employer on how much to withhold from each paycheck, you may not need to pay estimated taxes. If you are not a salaried W-4 employee, however, you will likely need to keep estimated tax payments on your radar. According to the IRS, you must pay estimated taxes if you expect to earn at least $ 1,000 in 2021 and your job type falls into one of these categories:
- Independent or freelance entrepreneur
- Sole owner
- shareholder of company S
There are other sources of income that fall under the estimated tax umbrella, including:
- Dividends and interest earned on sales of investments
- Royalties for previous work
- Owner’s rental income
- Unemployment benefit
- Retirement benefits
- Social security benefits, if you have other sources of income
- Prizes and awards
You may also have to pay estimated taxes as a full-time employee if your employer does not withhold your salary enough. To update your W-4 with the correct amount of withholding at source, use the IRS Tax Withholding Estimator, complete a new W-4 form, Employee’s Withholding Allowance Certificate, and submit it to your employer.
Estimated taxes are due whether you are paid by direct deposit, check, or digital payment services like PayPal, CashApp, Zelle, or Venmo. Note: while you should already pay taxes on that income, a new rule in the US bailout requires third-party payment networks to report $ 600 or more to the IRS.
When are the estimated taxes due?
Estimated taxes are paid quarterly, typically on the 15th day of April, June, September, and January of the following year. A notable exception is when the 15th falls on a public holiday or weekend. In these cases, you must file your return no later than the next business day. The deadlines for the 2022 estimated taxes are in the table below.
Estimated tax deadlines
|EARNING PERIOD||DUES TAXES|
September 1 – December 31, 2021
January 18, 2022
January 1 – March 31, 2022
April 18, 2022
April 1 – May 31, 2022
June 15, 2022
June 1 – August 31, 2022
September 15, 2022
Sep 1 – Dec 31 2022
January 16, 2023
How do I calculate the estimated tax payments?
There are several ways to calculate your quarterly tax payments based on your business model and annual income.
- If you are earning a stable income, estimate the tax you will have to pay for the year and send a quarter to the IRS each quarter. For example, let’s say you’ll earn $ 80,000, which puts you in the 22% marginal tax bracket. You will owe $ 17,600 in federal taxes or $ 4,400 each quarter in 2022.
- If your income changes during the year, you can estimate your tax burden based on your income and deductions from the previous quarter. The IRS Estimated Tax Worksheet can help you do the math.
If you’ve overestimated your income at the end of the year, you can fill out a Form 1040-ES to receive a refund, apply your overpayment to future quarterly taxes. If you have underpaid, the form can help you calculate what you still owe.
How do I pay my estimated taxes?
When filing your estimated taxes, use IRS Form 1040-ES or Form 1120-W if you are filing as a corporation. You can fill out the form manually using the included spreadsheets, or you can rely on your preferred tax software or tax advisor to walk you through the process and get the job done. From there, you can pay your federal taxes by mail or online through the IRS website. You will also find a complete list of accepted payment methods and options, including installment plans.
Do I also have to pay estimated state taxes?
It depends. If you live in one of the few US states with no income tax, your liability ends with the estimated federal taxes we discussed. However, if your state levies income taxes, you will make estimated tax payments using the same time frames as for federal taxes. Visit your state’s revenue department website or consult your tax advisor or tax software department for more personalized information.
What are the penalties if I don’t pay my estimated taxes?
It’s a good idea to post a reminder on the calendar as the quarterly deadline approaches to avoid paying a late penalty. You may be assessed a penalty if:
- You forgot to pay the estimated taxes or your payment was less than 90% of the amount of taxes owed
- In some cases you overpaid
If you would like to delve into the estimated tax penalties and terms of a waiver, see the instructions for IRS Form 2210.
Can I avoid paying estimated taxes?
Probably not without incurring these penalties. Certain categories of workers – in particular those whoseis exceptionally modest, inconsistent or seasonal – are exempt from having to make quarterly payments to Uncle Sam, however:
- If your net income was $ 400 or less for the quarter, you don’t have to pay any estimated taxes, but you still have to file a tax return even if no taxes are owed.
- If you were a U.S. citizen or resident alien for the whole of 2020, your total tax was zero and you did not have to file an income tax return
- If you are a farmer or fisherman and at least two-thirds of your gross income is from farming or fishing, the first three pay periods do not apply to you. Your only payment due date for estimated taxes for 2021 is January 18, 2022.
- If your income fluctuates significantly throughout the year (if you run a seasonal business, for example), you may be able to reduce or eliminate your estimated tax payments with an annualized income payment method. Refer to IRS Worksheet 2-7 to see if you qualify.