The IRS tax system is a pay-as-you-go one. Most people who earn wages have taxes withheld from their paychecks throughout the year.
While those whose income isn’t subject to withholding—such as self-employed individuals and business owners—must make quarterly estimated tax payments.
Calculating these quarterly payments can be a bit complicated. But it’s important to get it right.
It’s Easier to Estimate What You Owe.
The IRS makes it easier to estimate what you owe each quarter by using an estimated tax calculator.
Start with the total amount of federal tax you owed for 2023 and subtract any 2024 withholding.
Previous estimated taxes you paid or eligible credits such as child tax credit, earned income credit or American opportunity credit.
The result is the number you should send the IRS each quarter.
Most self-employed people like independent contractors, freelancers and those with side gigs are required to pay quarterly estimated taxes because there’s no tax automatically withheld from their earnings.
That’s because the federal income tax is a “pay-as-you-go” tax, which means you need to pay it as you earn and receive your money throughout the year.
The IRS estimates that the average taxpayer’s quarterly payment is about 25 percent of the tax they’ll owe at the end of the year.
The easiest way to figure out your quarterly estimated tax payments is by using the IRS’s online calculator, found on its Form 1040-ES.
It will walk you through calculating your income and
self-employment tax (which covers Social Security and Medicare), then divides that number by four to arrive at your quarterly estimated payments.
You can also use tax software or work with a tax professional to help you calculate your quarterly estimated taxes.
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It’s Easier to Save Money
The IRS has a pay-as-you-go policy, meaning most people who earn income pay taxes throughout the year instead of paying at tax time.
This typically happens through automatic withholding from paychecks, pensions and other government payments.
However, many other people have to make quarterly estimated tax payments if they expect to owe more than 10,000 in federal taxes at the end of the year.
These individuals include those who earn royalties, rental property income, interest or dividends, business profit and capital gains.
Individuals who do not have enough withholding from their paychecks may also need to make estimated payments.
It’s important to make these payments on a timely basis because missing deadlines can result in penalties and interest.
Keeping track of when your payments are due can be difficult, especially if you have a variable income.
The good news is that with Block Advisors, calculating your estimated quarterly taxes is easier than ever.
It’ll help you calculate what you need to pay and provide you with a payment schedule for the year.
To get started, simply add the service to your Block Advisors tax prep plan for $99 or sign up for a free consultation.
You can also make your payments online or by phone at no additional cost.
It’s Easier to Avoid Penalties
The main reason you want to pay quarterly is because it’s easier to avoid penalties if you do.
This is because the IRS has different ways to calculate what you owe, depending on your situation.
For example, if your income varies throughout the year, you can use the annualized income installment method to come up with an estimate of what you should be paying each quarter.
This method is based on your expected gross income, taxable income, taxes, deductions and credits.
For a quick and easy calculation, you can even use last year’s return as a base.
Then, as you receive additional income this year, adjust your estimated payments accordingly to ensure you stay on track to avoid a penalty.
You may also need to make quarterly estimates if you have income that isn’t subject to withholding, such as earnings from freelance work and self-employment.
This also includes income from alimony, rent, capital gains, prizes and awards, as well as pension income.
If you’re not sure whether you need to make estimated payments, the best thing to do is ask your tax professional for advice.
They can help you determine how much you should be paying and when you should be making payments.
They can also help you stay on track by reminding you of upcoming due dates and making it as easy as possible to make your quarterly payments.
It’s Easier to Correct Mistakes
Paying taxes may never be your favorite part of being self-employed, but it’s a necessary one.
It’s also not always easy, especially with multiple tax deadlines throughout the year.
By making quarterly payments, it’s easier to correct any mistakes you might make.
For example, if you overpaid on one quarter’s estimate, you can simply save that amount for the next quarter or reduce your quarterly payment to cover the difference.
You can also avoid errors by being sure to keep receipts and carefully check over your forms.
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A simple mistake like missing a form or making an error on the IRS website could cost you hundreds of dollars in penalties and interest charges. So through this blog i hope you might have understood what tax Payment is right for you, whether quarterly or annual?