Until the past few years, most people paid income taxes on an ongoing basis without even realizing it, and most people still do. The money they owe the IRS is taken out of their paychecks, then whatever they overpaid is given back after filing their tax return. However, these days, more people are starting to take on gig work and freelancing jobs, which complicates matters significantly.
Gig workers, independent contractors, and freelancers are all technically considered business owners by the IRS, and according to realtimecampaign.com, that means they’re responsible for handling their own taxes. More specifically, people that will owe at least $1,000 in federal income taxes are responsible for paying taxes every quarter. That’s where estimated tax payments come in.
What Are Estimated Taxes?
Estimated taxes must be paid in any circumstances where money is not withheld continually to pay the IRS and the state what they are owed. The taxes are reported using Form 1040-ES and must be paid directly to the Federal government. In many cases, people who pay Federal estimated taxes must do the same at a state level, but requirements vary.
How to Calculate Estimated Taxes
Got a Side Hustle? Here’s How To Calculate Estimated Taxes. First, be sure to follow the IRS standards set out in Publication 505. There are multiple ways to calculate estimated taxes, but no matter which of them taxpayers decide to use, they must ensure compliance with the applicable tax codes.
By far the easiest way to determine estimated tax payments is to use an app like QuarterlyTax by ADP. Specialized apps make it easy for taxpayers not just to determine how much they owe with a sufficient degree of accuracy to avoid underpayment penalties but also to maintain records that will be crucial in the event of an IRS audit. However, there are also ways to calculate payments by hand.
Some people calculate how much they owe by estimating how much they will make during the full tax year and dividing it by four. This strategy works well for people whose income remains stable throughout the year, but it isn’t effective for seasonal workers and others who face significant income fluctuation. In that case, annualizing taxes at the end of each quarter based on estimates of income and deductions so far that year is a better approach.
Paying Estimated Taxes
The IRS offers multiple options for paying estimated quarterly taxes. They include using the U.S. Treasury’s Electronic Federal Tax Payment System, using debit or credit cards, or paying in cash at certain retail partners. Taxpayers can find additional info about how to make quarterly payments online.
Avoid Fines By Paying On Time
The penalties for failing to pay estimated quarterly taxes on time can be significant. Business owners, freelancers, independent contractors, and gig workers should find ways to ensure they do not miss payments and that their payment amounts are correct. The easiest way to do so is by downloading a specialized app that can also help with keeping track of business income and expenses.
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