Ever wondered what estimated income taxes are? They're taxes paid on income not subject to withholding, due at specific times of the year. If you're earning, you might need to file them!
Estimated income taxes are prepayments of the tax you owe on earnings that don't have taxes withheld at the source, unlike a traditional salary. The IRS wants its share throughout the year, hence the quarterly deadlines. By paying in increments, you ensure that you don't end up with a massive tax bill and penalties come April.
Who needs to file quarterly?
If you're an individual, sole proprietor, partner, or S corporation shareholder and expect to owe tax of $1,000 or more when you file a return, you're likely required to make estimated tax payments. This isn't just for freelancers or independent contractors. Rental income, dividends, capital gains, and even certain retirement distributions can put you in this category!
Here's a detailed breakdown:
Self-Employed and Freelancers: If you're your own boss, running a small business, consulting, or freelancing, you probably don't have taxes withheld from your income. This means you'll need to make estimated payments to cover both income and self-employment taxes.
Landlords: If you're renting out property and earning rental income, that's another stream that's not automatically taxed. You'll need to keep a close eye on your rental earnings and expenses, and likely make estimated payments based on your net income.
Investors: Do you have investments that pay dividends or perhaps a stock portfolio with capital gains? These earnings might also subject you to estimated taxes, especially if they're significant.
Retirees: Thought retirement meant saying goodbye to taxes? Think again! If you're taking distributions from retirement accounts like IRAs or 401(k)s, and they're not already taxed, estimated payments might be in your future.
Gig Economy Workers: Driving for a ride-sharing service? Renting out a room on a home-sharing website? These modern "gig economy" roles often don't withhold taxes, making you responsible for estimating and paying them.
People with Multiple Jobs: If you have more than one job, especially if one doesn't withhold taxes or doesn't withhold enough, you might need to pay estimated taxes to avoid owing a lot at tax time.
High Earners: Even if you have taxes withheld from your paycheck, if you earn a significant amount of money, your withholding might not be enough. You may need to calculate if estimated payments are required to make up the difference.
Prize Winners: Lucky enough to win the lottery, a game show, or another cash prize? That income is likely not going to have taxes withheld, but Uncle Sam will still want his share.
The rule of thumb? If you expect to owe $1,000 or more when you file your return, you'll want to make estimated tax payments. It's always wise to consult with a tax professional if you're unsure. They can help you determine if estimated payments are right for you and, if so, help you calculate the right amount.
When do I have to pay my quarterly taxes?
Filing Deadlines:
To stay compliant, file by the due dates, which are usually as follows:
April 15
June 15
September 15
January 15
Most common myths about Quarterly Taxes
Myth: Only freelancers owe estimated taxes.
Reality: Anyone with significant income not subject to withholding might owe, from landlords to investors.
Myth: If I miss a payment, I can catch up next quarter.
Reality: While you can adjust your next payment, missed ones might attract penalties.
Myth: Estimated taxes are optional.
Reality: For many, they're mandatory. Not paying can result in heavy fines.
Myth: I can guess my income for the year.
Reality: Always best to be accurate. Overestimations mean you overpay, and underestimations can lead to penalties.
Myth: Paying estimated taxes means I won't owe in April.
Reality: These payments reduce your year-end tax bill, but other factors can influence your final tax outcome.
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Final Thoughts
Navigating the maze of estimated taxes can be challenging. But with the right information and, when needed, guidance from a tax professional, you can confidently tackle them. Remember, it's all about being proactive, accurate, and timely.
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