If you work for an employer who withholds income taxes for you, you may never have to worry about estimated taxes.
However, estimated taxes are important to know about if you have self-employment income, either full- or part-time, because if you haven’t paid enough income tax during the year, you may be faced with a penalty for underpayment.
What are Estimated Taxes?
When you generate income, the IRS expects taxes to be paid throughout the year. When an employer withholds taxes, that is what happens. However, when you have self-employment income, in most cases you must make quarterly estimated tax payments in order to meet this requirement.
Who Has to Pay Estimated Taxes?
If you have self-employment income and expect to owe tax of $1,000 or more when you file your return, you will likely have to make estimated tax payments through the preceding year. This is true for sole proprietors, partners and S-corporation shareholders. For corporations, estimated tax is generally required if more than $500 will be owed at tax time.
It’s also the case that if you owed money last year, you may have to pay estimated taxes this year.
Form 1040-ES from the IRS gives details on who needs to pay estimated taxes.
Who Does Not Have to Pay?
If, in addition to your self-employment income, you have a salary or wage job that issues a W-2, you can simply increase your withholding on your W-4 form with that company to cover your additional self-employment income.
You can also avoid paying estimated taxes in certain situations if you had no tax liability last year. (That is, if your total tax owed was $0, or if you did not have to file a return.)
In all other cases, you will be required to pay estimated taxes each quarter. Generally these are paid online, but they can also be paid by phone or mail.
If you are unsure about whether estimated taxes apply to you, how to pay them, and how much to pay, a tax professional can help you figure it out and avoid potential underpayment penalties. Contact us today to schedule your appointment. Email Cinda@CowderyTax.com or call 740-374-6942, or simply fill in the form below.