Whether you run a business or are self-employed as a contractor, and you take advantage of tax deductions, you are required to make a quarterly estimated tax payment in order to prevent incurring penalties and interest. This is the procedure to follow. Because most people are paid on a compensation basis, their employers withhold income tax from those paychecks. However, for the millions of individuals who are self-employed or have substantial non-wage income, there is typically no choice for automated withholding of taxes.
These taxpayers will be expected to make an IRS-estimated tax payment calculated on a quarterly basis. The calculation of your tax obligations on a quarterly basis can be challenging at times, but doing so is absolutely necessary. If you do not comply with them, you will be subject to a significant fine when it comes time to submit your taxes.
What exactly are quarterly taxes, and how exactly do they function?
People who are self-employed and have revenues that are greater than a certain benchmark will need to know how to pay quarterly taxes to the IRS. This method of payment is also known as estimated tax payments. Therefore, if you are a self-employed person, you may have not one but four Tax Days throughout the course of the year. Every quarter, you need to pay Social Security, Medicare, and your income tax.
Also read: Understanding Tax Compliance as a Remote Business
Tax on self-employment
This tax is typically 15.3% of your revenue earned from being self-employed, and it combines your contributions to Medicare and Social Security into a single tax. If you are paid on a compensation basis, then your workplace will share the cost of paying those taxes with you. But when you work for yourself, you are responsible for all taxes.
Taxes on income
You will be required to pay taxes based on your earnings at the same amount that is applicable to everyone else. If you are self-employed, you should consider putting aside approximately 25–30 percent of each paycheck to cover tax obligations, for which you can use a calculator. You won’t be taken aback by an unexpectedly high tax charge when it comes time to make your payment. Pay your taxes regularly, and remember, you can still take the standard deduction on personal expenses, even if you itemize business expenses.
The following is a list of the dates by which quarterly tax returns need to be filed
Income for self-employed individuals is due Monday, April 15 Monday, June 15 September 15th, when this was written January 15th, if you must know. The first three installments of the year are sent out during the same calendar year, while the fourth and final payment is not sent out until the following year in January. Suppose you are required to make four installments of $4,000 each time a quarter passes.
However, you have a tax debt from the previous year amounting to $3,000 that needs to be paid. You have the option of applying your return to the initial tax guesstimate that you paid. As a direct consequence of this, the initial tax guesstimate that you submitted, which was due on April 15th, has been lowered to $1,000. It is even possible to apply an overpayment to multiple forecasts at the same time.
Take, as an illustration, an overpayment of $10,000 from the year before. You are able to contribute $4,000 to each of the first two estimates while contributing $2,000 to the third estimate. You even have the option of dividing the overpayment equally among the original four estimates. If you overspend by $4,000, you can get a $1,000 discount on each of the next four payments.
Also read: 10 Small Businesses Tax Deductions You Need To Know
The most effective method for making anticipated quarterly tax payments
You can send in your quarterly tax contributions through the mail by using IRS Form 1040-ES. You also have the option to pay electronically by using the Direct Pay system of the IRS or the Electronic Federal Tax Payment System of the US Government. When you pay with a credit card, you will incur a cost that is approximately equivalent to 2% of the total purchase. At certain large IRS merchants, you can even use the currency to make your payment.
Bottom line
If you want more variety and control over your professional life, considering becoming self-employed could be the way to go. It does, however, come with a number of financial and tax responsibilities, such as determining which taxes you are required to pay, the amounts obligated based on your income level and employment, and making sure that quarterly payments are made on time. If you feel as though you need additional confidence regarding your quarterly tax payments, you should consult with a tax expert.
Leave a comment