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The IRS has seen an increasing number of taxpayers subject to estimated tax penalties, which apply when someone underpays their taxes. The penalty amount varies but can be
several hundred dollars.
The IRS urges taxpayers to check into their options to avoid these penalties. Adjusting
withholding on their paychecks or the amount of their estimated tax payments can help prevent penalties. This is especially important for people in the gig economy, those with more than one job and those with major changes in their life, like a recent marriage or a new child. There are some simple tips to help taxpayers.
Having enough tax withheld or making quarterly estimated tax payments during the year can help you avoid problems at tax time.
Taxes are pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.
There are two ways to pay tax:
Withholding from your pay, your pension or certain government payments, such as Social Security.
Making quarterly estimated tax payments during the year.
This will help you avoid a surprise tax bill when you file your return. You can also avoid interest or a penalty for paying too little tax during the year. Ordinarily, you can avoid this penalty by paying at least 90 percent of your tax during the year.
Why you should change your withholding or make estimated tax payments?
If you want to avoid a tax bill, you may need to change your withholding. Changes in your life, such as marriage, divorce, working a second job, running a side business or receiving any other income without withholding can affect the amount of tax you owe. And if you work as an employee, you don't have to make estimated tax payments if you have more tax withheld from your paycheck. This may be a convenient option if you also have a side job or a part-time business.
Some income is not subject to withholding. This includes some income from self-employment, the gig economy or some rental activities. Be sure to make estimated tax payments on those sources of income throughout the year. You may also make estimated tax payments if the withholding from your salary, pension or other income doesn't cover your income tax for the year.
You make your estimated payments based on the income you expect to earn and any credits you expect to receive in the year. You can use your prior year tax return as a guide to help you figure your estimated payments. You can use estimated tax payments to pay both income tax and self-employment tax (Social Security and Medicare).
When to and how to change your withholding or pay estimated taxes
Check your withholding often and adjust it when your situation changes. To do this fill out a new Form W-4 and give it to your employer. The IRS Tax Withholding Estimator is a helpful tool as well!
Estimated tax payments are due as follows:
January 1 to March 31 – April 15
April 1 to May 31 – June 15
June 1 to August 31 - September 15
September 1 to December 31 – January 15 of the following year
Note: If these due dates fall on a Saturday, Sunday or legal holiday, the payments are due the next business day.
Schedule a consultation to discuss estimated taxes today!
Source: IRS.gov | Estimated Taxes 2023
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