How to save money you didn’t even know you were spending as a self-employed, business owner, freelancer or even investor.
Paying estimated taxes in a timely manner is important for several reasons, particularly for individuals who have income that is not subject to withholding tax, such as self-employed individuals, freelancers, business owners, and investors. Here’s why paying estimated taxes on time is crucial.
Failing to pay estimated taxes on time leaves you and your business vulnerable to penalties and interest charged by the IRS. The tax system is designed to collect revenue throughout the year. If you underpay your taxes or don’t pay them on time, you could face penalties and interest charges. For those with irregular income, paying estimated taxes throughout the year not only helps with cash flow management but also avoids the penalty that can be imposed for not paying evenly throughout the year. If you didn’t catch that there are two ways to be penalized for not paying estimated taxes, let’s clarify. There are penalties for underpaying your estimated taxes and there are penalties for not paying the amount owed in an even manner throughout the year.
The government expects taxpayers to pay taxes on their income as they earn it rather than waiting until the end of the year. Regularly paying estimated taxes reduces the likelihood of accumulating a significant tax debt that you might struggle to pay all at once. Furthermore, consistently underreporting your income or underpaying your taxes could raise red flags and trigger an audit by tax authorities.
Meeting your tax obligations demonstrates your compliance with tax laws. This is important if you plan to apply for loans, mortgages, or other financial transactions that involve a review of your financial history. Lenders and financial institutions may consider your tax history as part of their decision-making process.
So when and how should you take action? There are four dates in the calendar year when estimated tax payments become due. April 15, June 15, September 15 and January 15 of the following year. If any of these dates fall on a holiday or weekend, the due date is usually pushed back to the next work day.
To ensure that you pay the correct amount of estimated taxes, it’s important to accurately estimate your income and expenses, understand the tax laws that apply to your situation, and keep track of your payments.
If in doubt on what to pay it’s always better to have paid more than you owe than less. Any overpayments will be refunded to you when you file your annual tax return or you can offset them with your next estimated tax payment. There is a rule of thumb though to help you know what you can pay to make sure you don’t get penalized for underpayment.
Regardless of what you owe or will owe for the current year, there’s always a safe path to abide by. That is to pay 100% of what you owed the prior year if you make less than $75,000 as a single filer. If you make more than that, you should pay 110% of your prior year taxes in four equal installments throughout the year to avoid penalties.
We recommend making any and all payments online as mail fraud has increased. If you send anything to the IRS via the US Postal Service, make sure to get tracking notifications. You can sign up to make those online payments with the IRS on their website:
If you’d like to read more info from the IRS about estimated taxes: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
DISCLAIMER:
The information provided here should not be considered as legal, financial, or tax advice. Tax laws and regulations are subject to change, and individual circumstances can vary widely. When dealing with legal or financial matters, it’s always advisable to consult with a qualified attorney, accountant, or tax professional who can provide guidance tailored to your specific situation and the most up-to-date information on relevant laws and regulations.