Finding out you owe federal income taxes at filing time is no fun, but did you know that the IRS can charge you interest and penalties if you don’t properly estimate (and pay) your taxes on at least a quarterly basis? If you’re self-employed or earn additional income from sources that do not withhold federal income taxes (i.e., you receive 1099 forms), you may have to make quarterly estimated tax payments.
Who Must Make Quarterly Estimated Tax Payments?
The IRS explains, in excruciating detail, how to determine whether you’ll need to make estimated tax payments in Publication 505. Put simply, however, you will generally need to make estimated tax payments if you expect to owe the IRS $1,000 or more in taxes when you file your tax return.
If you are self-employed, you will have to send the IRS between 22.5% and 28% of your gross income four times a year to cover your income tax and social security tax obligations. If you are employed full-time but earn additional income from sources that do not withhold income taxes from your pay (and issue you form 1099), things get a little tricky.
Chances are, if owed taxes last year or had only a small refund and you are earning more than $1,000 from sources that do not withhold income taxes, you will need to make estimated payments.
When Are Estimated Payments Due?
Estimated payments are due four times a year. You must pay the IRS the appropriate percentage of your earnings from which taxes were not withheld by the payment deadline.
- For income earned Jan. 1—March 31, pay by April 15
- For income earned April 1—May 31, pay by June 15
- For income earned June 1—August 31, pay by September 15
- For income earned Sept. 1—Dec. 31, pay by January 15
Why Are Estimated Payments Due?
Employees on a payroll have their federal income taxes automatically deducted every pay period based upon the information they provided on their W-4 form. The employees’ company or payroll vendor collects this money and sends it off to Uncle Sam on a regular basis to keep the wheels of government turning.
But when you become self-employed, or earn enough money on the side, you get paid by sources that that do not withhold taxes from your check. So why can’t you just earn income all year and not pay the IRS until you file your tax return the following April? Basically, the IRS wants its money now. After all, if somebody owed you money, would you rather be paid now, or in several months? Exactly.
The IRS expects the self-employed to pay federal taxes on a rolling basis just like everybody else. Those who don’t pay up by the quarterly payment dates will face an annual 8% in interest on the unpaid tax liability for every day the payment is late.
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Do you have to make estimated tax payments? Have you been hit with interest or penalties for mistakenly missing quarterly payments?