People who are salaried and receive a consistent monthly paycheck are relieved of the responsibility of paying taxes and covering federal tax obligations such as income tax, social security, and Medicare. That’s because their employer deducts and matches taxes from their paycheck before it reaches their bank account. But what if you’re self-employed, a gig worker, or have income that isn’t subject to withholding from state income taxes? Is it still necessary for you to pay taxes?
Here’s what quarterly taxes are, how to pay them, and what you need to do about when it’s time to file your tax returns.
WHY YOU NEED TO PAY QUARTERLY TAX PAYMENTS?
Uncle Sam uses a pay-as-you-go tax scheme, which ensures that if you make money that is not subject to withholdings (e.g., freelancing, stipends), you must pay your tax bill as you earn it over the year, rather than paying it all at once at the end. The term “quarterly” refers to the fact that the tax is collected in four quarterly instalments. These payments are based on an estimate of your self-employment adjusted gross income and what you intend your personal tax return to be for the year.
WHO MUST PAY QUARTERLY TAXES?
Self-employed individuals who assume a tax burden of at least $1,000 and whose income is not automatically deducted from their earnings are normally expected to pay quarterly taxes, according to the Internal Revenue Service (IRS).
Simply put, someone with a significant taxable income from one of the above-mentioned sources must handle their own books and calculate how much they owe based on their business earnings. You’ll get a refund if you end up overpaying by the end of the year.
Underpayment, on the other hand, results in an IRS penalty. Check Form 2210 to see if you owe any penalties for not paying your taxes on time. Also, read Form 1040-ES, Individual Estimated Tax, and Form 1120-W, Corporation Estimated Tax, to learn more about who is subject to quarterly taxes.
WHO IS NOT REQUIRED TO PAY QUARTERLY TAXES?
If you earn a monthly salary and wage, you can stop paying quarterly taxes. You may do this by requesting that your employer deduct a larger portion of your wages so that they can pay your quarterly taxes on your behalf using Form W-4. You’ll see a special line on the W-4 form that asks you to enter the sum you want your employer to withhold.
HOW SOMEONE CAN AVOID PENALTIES?
It’s important to be as precise as possible when estimating your quarterly taxes to prevent underpayment penalties. The IRS provides a “safe harbor” approach because estimating tax liability can be difficult, particularly if your income is irregular.
