The economic impact of the COVID-19 pandemic has led to a surge in the growth of self-employed workers who rely on freelance opportunities or contract work. If you’re one of the countless Americans who have hung up your own shingle – or if you own property or collect money from investments – it’s important to have a strong understanding of estimated-tax payments and how to build out a viable plan for payment.
Without a plan for estimated taxes, you’re more likely to get hit with a larger than expected tax bill at the end of the year, not to mention face various penalties.
First, let’s clarify what we mean by estimated taxes, which is a method you can use to pay tax on income that isn’t subject to any withholding. For instance, perhaps at your previous job your employee would have taken tax money out of each of your paychecks, making it easier for you to manage your taxes. If you’re self-employed now, you’re responsible for managing your own tax obligations, and that’s where estimated-tax payments can be helpful.
It also can apply to landlords and property owners who collect revenue from rentals, as well as proceeds from interest or dividends for things like investments and stocks. How will you know what your estimated tax for the current year should be? You’ll need to plan on making quarterly estimated-tax payments to avoid any penalties if:
- you expect to owe $1,000 or more in federal income taxes this year, even after accounting for your withholdings and refundable credits; and,
- you expect withholding and refundable credits to be less than 90 percent of your tax liability for this year or less than 100 percent of your liability last year.
Here are a few additional things to know about planning for your estimated-tax payments:
- It’s often best to make your estimated tax on a quarterly basis. It allows for flexibility throughout the year, while also helping you stay organized and ahead of the game. But you can pay your estimated tax on a monthly basis if that suits your needs better.
- Estimated tax payments are generally due April 15, June 15, September 15 and January 15. Develop a system to ensure those deadlines are met and that your preparation and payments don’t take up too much of your time.
- An easy and secure way to pay your estimated taxes is through the Electronic Federal Tax Payment System, but you also can rely on check or money order using the Estimated Tax Payment Voucher or by credit or debit card.
At Padgett, we have a trusted network of accountants, CPAs, Enrolled Agents and other tax professionals who are ready to work with you to set up an estimated tax plan that best suits your needs. Find an office near you and reach out to one of our tax professionals to set up a consultation.