One issue self-employed people frequently face is effectively monitoring and remitting their taxes throughout the year. Even though self-employment can be a very fulfilling experience, allowing you to control your own time, pursue ambitious goals, and provide employment prospects, it can also present several obstacles.
Taxes must be paid during the year as you earn or receive income through withholding or estimated tax payments. If the amount withheld from your salary or pension is insufficient, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes, or awards, you may be required to make anticipated tax payments.
Income taxes are collected continuously in the United States. This means that an employer pays federal and state taxes on our behalf by withholding a specific amount from each payment.
If you operate as a freelancer or get certain non-wage income, you may be required to pay what the IRS refers to as “estimated quarterly taxes.” Here’s what they are and how they work.
A penalty may be imposed if you do not pay enough tax through withholding and anticipated tax payments. You may also be penalized if you make your anticipated tax payments late, even if you are due a refund when you file your tax return.
Knowing how to estimate and remit your taxes throughout the year is a vital skill for self-employed persons.
These must be paid quarterly by the Internal Revenue Service’s schedule (IRS).
Who Is Required to Pay Estimated Tax?
Individuals, including sole proprietors, partners, and S corporation shareholders, must typically submit anticipated tax payments if they expect to owe $1,000 or more on their return.
Corporations must usually make anticipated tax payments if they expect to owe $500 or more in tax when their return is filed. If your tax was more significant than zero in the previous year, you might be required to pay the estimated tax for the current year.
Why Should You Make Estimated Tax Payments?
Even though we only file our tax returns once a year, we must pay taxes on our income yearly. Employees achieve this through withholding taxes that their employers remit on their behalf. However, self-employed individuals must estimate and remit their tax payments.
If you are obligated to make estimated tax payments, you must do so. Otherwise, you run the chance of receiving a big tax bill all at once after filing your tax return. Most people cannot afford to pay their entire tax due at once, and being required to do so may force them into debt or bankruptcy.
Calculating Quarterly Estimated Taxes
You can calculate how much you’ll owe for the year and send one-fourth of that amount to the IRS. For example, if you anticipate owing $10,000 in 2022, you would submit $2,500 each quarter. This may work well for folks whose income is fairly consistent throughout the year or who clearly know what their income will be.
Another approach is calculating your annual tax bill based on your earnings this year. This is frequently preferable for persons whose income fluctuates. In essence, you annualize your taxes after each quarter based on a fair assessment of your income and deductions thus far this year. The IRS includes a worksheet to assist you with the calculations.
What Should You Consider?
In addition to keeping up with expected tax payments, self-employed individuals should plan ahead of time for other financial obligations. Although individual circumstances will differ, it may be prudent to set aside a portion of your monthly income for retirement savings, life insurance, or longer-term financial goals such as home ownership or college tuition.
If you’re married and your spouse works and has taxes withheld, they may have enough taxes withheld to cover the two of you.
You can do this by providing his or her employer with a new Form W-4 that specifies how much tax to withhold from each paycheck. You can modify your W-4 at any time. Use Form W-4P if you are receiving a pension or annuity.