Hi, I'm Candace
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When you’re working for an employer, it is their responsibility to ensure that federal and state taxes are withheld from your paycheck. However, if you’re an independent contractor, freelancer, own your own business, or do any income-producing side hustle, the burden to pay Uncle Sam is solely on you. Bummer, I know.
The good news about this is that you get paid first and the IRS gets paid last. However, skipping out on those quarterly estimated tax payments can be costly, so here is what you need to know about if and when you have to pay them.
1. Who Has To Pay?
This answer is pretty simple. Individuals, including sole proprietors, partners, LLC owners, S corporation shareholders, and freelancers have to pay quarterly installments of estimated tax if you expect to owe more than $1,000 when you file your tax return. If your tax liability throughout the year is less than $1,000, then you don’t have to make estimated payments.
Unfortunately it’s not always so simple to determine if you will owe $1,000 or more in taxes. I recommend working with a CPA to perform a year-end tax projection or you can use the IRS’s worksheet to help you estimate your taxes.
2. How Much Do You Owe?
To avoid underpayment penalties, you have to meet one of these two IRS thresholds during the year:
3. When Do You Pay?
For both options, the IRS requires four payments instead of one lump payment at the end of the year. These quarterly payments are due the 15th of April, June, September, and January. If the 15th falls on the weekend, payments are due the next business day.
And be sure to check out your state’s website for their due dates! They are not always the same as the federal due dates.
4. How Do you Pay?
The fastest and easiest way to make estimated tax payments is to do so electronically using IRS Direct Pay. Most states also require quarterly estimated tax payments, so be sure to check your state’s tax rate and make those payments as well. Most states also allow for online payments!
5. What Happens If You Don’t Pay?
If you don’t pay quarterly taxes (and you are supposed to), you could end up owing the IRS an underpayment penalty in addition to the taxes that you owe. The penalty depends on how much you owe and the amount of time that you owed it to the IRS.
Candace is the founder of NewWay Accounting and is a CPA who specializes in working with fellow entrepreneurs. She strives to take the fear and anxiety out of taxes and help empower small business owners to feel more confident and in control of their finances.
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