WARNING: What You Need To Know About Estimated Payments
As an employee, you have covered most of the tax requirements automatically, through payroll deductions, but as a self-employed or business owner, this responsibility is on you.
According to the IRS, anyone who pays too little tax through withholding, estimated tax payments, or a combination of the two may owe a penalty. In some cases, the penalty may apply if their estimated tax payments are late, even if they’re due a refund.
You can make a big payment on April 15th without paying penalties or interest IF you qualify under one of the following safe harbor rules.
People who base their estimated tax payments on last year’s tax will normally avoid a penalty if they pay 100 percent of the amount shown on Line 15 of their previous year Form 1040 (110 percent, if their income was more than $150,000).
The easiest way to stay in compliance is to take the amount you paid last year for your self-employment income and your self-employment tax, divide that amount by four (4) and pay that amount quarterly. If you end up overpaying you will get a refund.
If your income does not come in evenly throughout the year, your tax professional should be able to provide you with a simple formula to use each month or each quarter to keep you in good stead. This is also helpful if you are anticipating an increase in income during the year.
The most significant penalties occur when you are not able to pay your entire tax bill by April 15. Making regular estimated tax deposits throughout the year will help you avoid the risk of running short on funds at tax time. So we reiterate the following:
You can’t just wait until April 15th and pay your tax bill. If you do you’ll owe penalties (1/4 to 1% of the amount owed for each month it is owed) and interest (at the rate of the federal short-term rate– currently around 0.25%- plus 3%).
However, a tax professional or tax planner still has time to help you with strategies to reduce your tax bill for the next year if you get help on time. Most strategies that will help you reduce your taxes need to be in place during the tax year, so if you wait until April there is not much to do to help.
If you need help with your estimated payments or to develop a tax plan, please contact us by scheduling a meeting using our calendar: https://book.mybooksntaxes.com/lite/20-min-call
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