How To Avoid Estimated Tax Penalties
How To Avoid Estimated Tax Penalties
Estimated tax payments are a routine aspect of the tax system. Employers will commonly withhold taxes each pay period. However, when you’re self-employed, you have to pay your taxes automatically. The Internal Revenue Service (IRS) uses the withholding amount and other factors to establish an estimated tax payment requirement. This can lead to unwelcome surprises if you don’t meet the deadlines.
Estimated tax penalties are most likely the last thing you’d like to think about, but you should. In case your self-employment or side gigs comply with a certain threshold, you must submit estimated taxes. In case you don’t, the IRS may impose penalties and interest.
Below are tips on how to avoid estimated tax penalties:
1. Know When to Pay Estimated Taxes
To avoid estimated tax penalties, the first thing you’re required to do is find out when they are due. People who are self-employed income owners are required to pay estimated taxes quarterly. The deadlines are typically:
– April 15 for January through March
– June 15 for April through May
– September 15 for June through August
– January 15 of the following year for September through December.
In some cases, a shift in your income can also affect an estimated tax payment deadline. Take note of these deadlines and make a point to submit your payments before they pass.
2. Know How to Calculate Your Estimated Taxes
For those who are self-employed individuals, you’re required to compute taxes on estimated net income. Three methods can be used to calculate estimated taxes:
– Prior year calculation: This is computing it using your tax information from the prior year.
– Annualized income: This method demands more work since you’ll need to calculate your net income for every quarter.
– Current year tax rate: This one is self-explanatory. The most recent tax rates will be used to calculate the payment.
Whatever method you decide to utilize, make sure you accurately compute your estimated taxes. Inaccurate payments may lead to penalties.
3. Keep Track of Your Expenses
Self-employed workers are allowed to deduct business expenses from their net income. These deductions help reduce the tax burden. Keeping track of your expenses throughout the year will aid in estimating your quarterly payments. As a result, you decrease your chances of incurring penalties.
4. Use the Right Forms to Submit Payments
It is important to use the correct forms to submit your payments. Individuals and businesses submit estimated tax payments using forms 1040-ES for the estimated tax payments. In case you decide to use another form, you may not receive credit for your payment. It’s essential to pay attention to instructions whenever submitting payments.
5. Set Aside Money for Taxes
One of the necessary things a self-employed individual needs to do is set aside money for taxes. As there are no taxes subtracted from your paychecks, you’ll need to keep track of the amount you owe to the IRS. Try to set aside funds from every payment to ensure that you have sufficient money available when it’s time to submit your quarterly payment.
6. Avoid Underestimating Your Payments
A common mistake the self-employed make when submitting payments is underestimating the amount they owe. To help avoid this mistake, try to calculate your payments accurately or consult an accountant for assistance. Inaccurate estimates may lead to penalty payments.
7. Use Electronic Payment Options
The IRS encourages taxpayers to use electronic payment options since they are secure, convenient, and provide the necessary documentation. The Electronic Federal Tax Payment System (EFTPS) and the Online Payment Agreement (OPA) are two electronic payment options available. These payment options make it simple to monitor your payments and avoid penalties.
8. Keep Good Records
Good record-keeping can also help you avoid estimated tax penalties. Maintain a record of your expenses, tax payments, and revenue. It will make estimating your income easier, making it a fast process for computing quarterly payments.
Summary
It is possible to avoid estimated tax penalties with good planning, organization, and knowledge. Know when to pay your taxes, keep accurate records, estimate correctly, and organize your payments. If you require additional support, endeavor to seek an accountant’s assistance. Avoiding underestimations of your payments and setting aside money for taxes will ensure that you’re compliant, and you’ll avoid penalties.