Self-employed people, like employees, are not withheld from wages and must send quarterly estimated tax payments. However, if your income varies from month to month or from year to year, it is difficult to determine how much to pay. Not to mention the penalties for underpaying, you don’t want to send so much that your daily expenses suffer, or so little that you run into a shocking tax bill when filing your tax return.
The following tips will help you calculate your estimated quarterly tax payments to minimize the possibility of penalties and budget breaks.
- Open separate checks and credit card accounts for your business. This provides a quick reference for your operating costs and income.
- Submit quarterly payments and, if anything, overpay a little. You will get it back.
- For the first year, seek advice from a self-employed friend, accountant, or IRS helpline.
Due to Hurricane Aida, some residents and businesses in Louisiana, Mississippi, New York, and New Jersey are allowed to extend the deadline for filing and paying to the IRS. Most are related to future due dates for quarterly submissions and payments. For more information, go to the IRS Tax Exemption Page and click 2021.
1. Make payments based on last year’s revenue
Even if you are self-employed, you can avoid paying penalties by paying at least the same amount of tax as the previous year. You can see the total tax paid in last year’s tax return. We will split last year’s tax into four equal payments, each of which will be remitted by the IRS quarterly dates (April 15, June 15, September 15, January 15).
If this year’s tax is higher than last year, you will still be liable for the unpaid portion, but you don’t have to pay the underpayment penalty. For example, suppose you paid $ 4,000 in taxes last year. This year we will send you four equal payments of $ 1,000. You calculate your tax at $ 5,500 at the end of this year. You can send a check to the IRS with a difference of $ 1,500 at tax without paying a penalty.
Please note that if you were not obliged to pay taxes in the previous year, you will not be penalized if you do not pay by the tax return time. You can choose how much you want to send throughout the year, but be aware that if you don’t send enough, you may incur significant taxes at the end of the year.
2. Get advice for the first year
During your first year of self-employment, talk to a self-employed friend or hire an accountant to handle your tax calculations for you. In any case, you can figure out how much you have to pay, determine the costs you can deduct, and get used to the process.
3. Use a separate account for project costs
Opening a separate bank account and a credit card account dedicated to operating expenses will simplify your life and make it easier to estimate quarterly taxes.
These provide a record of operating costs for easy reference of tax timing. It’s much easier than going through a pile of paper receipts while paying taxes, and much easier to double-check if you have a question about expenses.
4. Keep running aggregates of your income
If you don’t continue to aggregate your income and don’t pay the estimated tax amount accordingly, you could get a sticker shock in April next year. Calculate your income at the end of each quarter and use this as the basis for whether you should increase or decrease your quarterly payments.
If you use that dedicated checking account for your business income deposit, the running aggregation will take a few minutes to check in your online bank records.
5. Use the IRS1040-ES worksheet
If your income varies significantly from year to year, the best way to estimate quarterly payments is to use the IRS 1040-ES worksheet. The worksheet guides you in calculating your expected tax obligations and takes into account certain general deductions you are eligible to claim.
The underpayment penalty rate is the Federal Short Term Fund interest rate plus 3%.
You can fill out the worksheet quarterly, or at least quarterly to represent any unusual changes in your income. If your business experiences significant quarterly fluctuations, you may need to adjust your estimated tax payments to avoid the big surprises of April next year.
6. Always overestimated, at least a little
Fines can be high, depending on whether you underestimated your tax payments.
Interest will be charged according to the underpayment amount from the quarterly due date to the payment date. The underpayment penalty rate is the federal short-term tax rate plus 3% and is announced quarterly. Therefore, if you are underpaid in the first quarter of the tax year, you will have to pay a different penalty than if you were underpaid in the third quarter.
If you don’t know the exact amount to pay each quarter, overestimate your taxes a bit. You won’t lose money in the long run. It will be refunded as a tax refund.
7. Place the IRS tax helpline on the speed dial
The IRS free helpline is the best source of information for answering your questions. The number of individual taxpayers is 800-829-1040.
Unless you hire someone to do your taxes for you, you are your own accounting department. Unless you are actually an accountant, you may ask some questions, at least during the first year of self-employment.
If you are self-employed, you should be very careful in calculating and paying your estimated tax amount to avoid underpayment penalties. Following the tips above for calculating your estimated quarterly tax payments will minimize the possibility of penalties and budget breaks. If you have any questions regarding a particular tax situation, be sure to consult your tax accountant.