Anyone who earns income that hasn’t already had taxes taken out might need to pay estimated taxes. This includes self-employed taxpayers, independent contractors, and taxpayers who have significant amounts of interest, divided, or capital gain income.
Failing to Pay Estimated Taxes
If you don’t pay estimated taxes, you could run into several problems:
- You’ll face a huge tax bill when you file your tax return.
- You’ll be charged underpayment penalties and interest.
- If you haven’t been setting money aside throughout the year, you might not be able to pay your tax bill, resulting in more late-payment penalties and interest.
Avoid this by understanding your estimated tax obligations and paying enough throughout the year.
How Much to Pay
There are a few different safe harbors you can use to determine how much you should pay in estimated taxes. However, these safe harbors only protect you from underpayment penalties. If you expect to earn a lot more this year than you did last year, you might want to go beyond the safe harbor amount to avoid a big tax bill when you file your return.
You need to pay at least 90 percent of your tax liability throughout the year, or at least 100 percent of last year’s total tax liability. Payments are due quarterly.
The easiest method is to divide last year’s tax liability by four and pay this amount each quarter. If your income is going to be lower or much higher this year, you might want to adjust this amount.
Avoiding Estimated Taxes
You may be able to avoid estimated tax payments altogether if you or your spouse also works as an employee. Simply adjust your W-4 form to increase your withholding and you won’t have to worry about estimated tax payments.
Of course, you could pay estimated tax payments instead of adjusting your W-4. This might allow you to be more precise, but also involves more work.
The important thing is to track your withholding and estimated tax payments from year-to-year and make changes as needed. You don’t need to receive a huge tax refund, but you also don’t want to get an unexpected tax bill or be charged underpayment penalties.
If you have IRS tax debt because you didn’t pay enough in estimated taxes, contact a tax resolution attorney to discuss your tax debt management options.
The Gartzman Law Firm offers tax settlement help for both federal and state tax debt. Use our contact form to request a consultation with an Atlanta tax resolution attorney.