Did you just pay an extra chunk of money when you filed your 2021 income taxes? Were penalties included? It’s not fun to learn that you owe more in tax when you file your return. But if you earn income from self-employment or get investment income, no taxes are withheld from that income, and you can owe a lot when you file. How can you avoid that expensive bad news? You can project your income tax liability and pay what you expect to owe during the year.
The IRS requires taxpayers to pay their income tax liability as their income is earned. States that charge income tax and the District of Columbia have similar rules. Employers withhold and remit income taxes to cover their employees’ tax liability on wages and other compensation. But taxpayers with income from interest, dividends, capital gains, and self-employment may need to make estimated tax payments to cover the related income tax liability.
Taxpayers should regularly assess their need to make estimated income tax payments, as well as other taxes such as the self-employment tax. All the necessary details about making payments, when and how much are at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.
The IRS website has a lot of information to read, so let’s boil it down to three important things to know:
- When are Estimated Taxes Due?
For estimated tax purposes, the year is divided into four quarters. Although some payments due dates changed temporarily due to COVID, estimated tax payments are general due on April 15, June 15, September 15, and January 15 of the following year. If the payment due date falls on a Saturday, a Sunday, or legal holiday, the payment is due the next business day.
- How Much Do You Need to Pay?
Estimated tax payments are based on estimated income and resulting tax liability. An estimated tax payment is due if the liability is at least $1,000, after subtracting withholding and refundable credits. Withholdings or estimated payments must equal or exceed the smaller of 90% of your 2022 tax liability, or 100% of your 2021 tax liability. Calculate your 2022 tax liability at this link https://www.irs.gov/forms-pubs/about-form-1040-es.
- What if You Don’t Pay Enough?
Interest is due on any unpaid balance, accrued daily from the time the tax liability was created (i.e., by receiving income) until the tax is paid. Interest accrues daily, which can really add to your tax bill. Clearly, the IRS is serious about getting paid on time. Figure your 2022 federal income tax bill by using the IRS Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator.
If you paid a chunk of money when you filed you 2021 income tax return, or if you will receive income with no tax withholdings in 2022, you might need to make estimated income tax payments. The IRS has all the tools to figure it out at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.