Most people don’t spend a lot of time during the year thinking about their tax payments because their employer simply withholds those payments from their paychecks. If you’re among the nearly 15 million self-employed people in the United States, however, you will likely have to submit your own estimated tax payments throughout the year. That’s also true if you receive a certain level of income outside of your regular employment. The Virginia Society of Certified Public Accountants (VSCPA) explains how it works and offers tax planning advice.
Who Pays Estimated Taxes?
How do you know if you’re affected? In most cases, you should pay estimated taxes if you’re going to owe $1,000 or more when you file your tax return. There are exceptions, though. Those who are filing as corporations, for example, are subject to estimated taxes if they expect to owe $500 or more. And simply having additional income, from self-employment or other sources, doesn’t mean you have to pay estimated taxes, as long as the money withheld from your regular employee paychecks adds up to at least 90 percent of the tax you’ll owe this year or 100 percent of the tax shown on your return for the prior year, whichever is smaller.
How Much Do You Pay?
This part can be tricky, especially if you’re just starting self-employment. The basic idea is to estimate how much you expect to make in the coming year and determine what deductions and credits will apply, in order to calculate your taxable income and figure out how much tax you will owe. It may be helpful to use your prior year’s tax return as a starting point and guide. You will be paying your estimated taxes quarterly, so be sure to refigure your estimated tax for the next quarter if you determine that you’ve estimated your earnings for the year too high or too low. If you’re not certain how to predict what tax you’ll owe, your CPA can help you come up with a reasonable estimate.
When Do You Pay?
Estimated tax payments are generally due four times a year, on April 15, June 15, and Sept. 15 of the current tax year and Jan. 15 of the following tax year. If you’re in a new business and not yet earning income, you don’t have to start paying estimated taxes until you do generate some, even if you believe you’ll be getting income later in the year.
What If You Don’t Pay Enough?
If you fail to pay at least 90 percent of the taxes you ultimately owe for the tax year — or at least 100 percent of the tax you paid last year (110 percent if you’re considered a high-income taxpayer) — you will face a 3 percent underpayment penalty. Of course, you’ll also have to pay the taxes that are still due. One thing to remember: Even if you’re not self-employed and don’t have outside income, you may owe estimated taxes simply because your employer isn’t withholding enough for you. You can fix that easily simply by raising your withholding.
Get a Handle on Your Finances
If you’re just launching a new business or starting out as a freelancer, estimated taxes aren’t the only reason to create a budget. Doing so will also help you manage your income and debt more easily. Proper recordkeeping can also ensure that you have the information you need to make important decisions about your growing business.
Your CPA Can Help
Whether you’re seeking ways to manage or minimize your taxes or you want help with a new or growing business, your local CPA can offer the expertise you need. Turn to him or her with all your financial concerns.