If you receive a regular salary from a business in the United States, chances are your employer will withhold income tax from every paycheque. But if you’re one of the millions of small business owners,and independent taxpayers, there is no automatic mechanism to withhold your taxes throughout the year.
While the process is a bit more manual, the IRS has a process to help you avoid having to pay a huge bill on tax day. Here’s everything you need to know about estimated taxes.
What are the estimated taxes?
If you earn or receive income that is not subject to federal withholding taxes throughout the year – ancillary income or income from a rental property, for example – you will pay as you go with estimated taxes. . Estimated tax is a quarterly payment based on your income for the period. Essentially, estimated tax allows you to prepay a portion of your income tax every few months to avoid paying a lump sum on tax day.
Who should pay the estimated taxes?
If you have completed the IRS Form W-4, which provides instructions to your employer on how much to withhold from each paycheck, you may not need to pay estimated taxes. If you are not a salaried W-4 employee, however, you will likely need to keep estimated tax payments on your radar. According to the IRS, you must pay estimated taxes if you expect to earn at least $ 1,000 in 2021 and your job type falls into one of these categories:
- Independent or freelance entrepreneur
- Sole owner
- shareholder of company S
There are other sources of income that fall under the estimated tax umbrella, including:
- Dividends and interest earned on sales of investments
- Royalties for previous work
- Owner’s rental income
- Unemployment benefits
- Retirement benefits
- Social security benefits, if you have other sources of income
- Prizes and awards
You may also have to pay estimated taxes as a full-time employee if your employer does not withhold your salary enough. To update your W-4 with the correct retainage amount, use the IRS Withholding Tax Estimate Tool, fill in a new one W-4, Employee Payroll Deduction Allowance Certificate form and submit it to your employer.
When are the estimated taxes due?
Estimated taxes are paid quarterly, typically on the 15th day of April, June, September, and January of the following year. A notable exception is when the 15th falls on a statutory holiday or on a weekend. In these cases, you must file your return no later than the next business day. The deadlines for the 2021 estimated taxes are in the table below.
Estimated tax deadlines
|EARNING PERIOD||DUES TAXES|
September 1 – December 31, 2020
January 15, 2021
January 1 – March 31, 2021
April 15, 2021
April 1 – May 31, 2021
June 15, 2021
June 1 – August 31, 2021
September 15, 2021
Sep 1 – Dec 31 2021
January 18, 2022
What are the penalties if I don’t pay my estimated taxes?
It is a good idea to post a reminder in the calendar as the quarterly deadline approaches to avoid paying a late penalty. You may also owe a penalty if:
- Your payment was less than 90% of the amount of tax due
- In some cases you overpaid
If you want to learn more about tax penalties and exemption conditions, see the instructions in IRS Form 2210.
Can I avoid paying estimated taxes?
Probably not without incurring these penalties. Certain categories of workers – in particular those whoseis exceptionally modest, inconsistent or seasonal – are exempt from having to make quarterly payments to Uncle Sam, however:
- If your net income was $ 400 or less for the quarter, you don’t have to pay any estimated taxes, but you still have to file a tax return even if no taxes are owed.
- If you were a U.S. citizen or resident alien for the whole of 2020, your total tax was zero and you did not have to file an income tax return
- If you are a farmer or fisherman and at least two-thirds of your gross income is from farming or fishing, the first three pay periods do not apply to you. Your only payment due date for estimated taxes for 2021 is January 18, 2022.
- If your income fluctuates significantly throughout the year (if you operate a seasonal business, for example), you may be able to reduce or eliminate your estimated tax payments with an annualized income payment method. Refer to the IRS 2-7 worksheet to see if you qualify.
How do you pay the estimated taxes?
When filing your estimated taxes, use the 1040-ES IRS tax form or 1120-W form if you are filing as a corporation. You can fill out the form manually using the included spreadsheets, or you can rely on your preferred tax software or tax advisor to walk you through the process and get the job done. Visit the IRS website to see a complete list of accepted payment methods and options, including installment plans.
Do I also have to pay estimated state taxes?
It depends. If you live in one of the few US states with no income tax, your liability ends with the estimated federal taxes we have discussed so far. However, if your condition Is withholding income taxes, you will make estimated tax payments using the same time frames as for federal taxes. Visit your state’s revenue department website or consult your tax advisor orfor more personalized information.