Paying Estimated Taxes if You Are Self-Employed
Self-employment affords individuals many benefits as compared to individuals employed in traditional jobs. Self-employed individuals can set their own schedules, work from home, and enjoy an increased work/life balance. When it comes to taxes, however, things can get a little complicated for self-employed individuals. In traditional employment, wage-earners have their taxes automatically taken out of their checks by their employers. Self-employed individuals, on the other hand, are responsible for their own tax withholdings.
In the rising “gig economy” – where people are choosing more freelance, contract, or gig work as opposed to traditional jobs – many self-employed individuals may not be aware that they are required to pay the IRS quarterly for income they earn throughout the year. As a result, the IRS has reported an increase in the number of penalties for individuals who made mistakes on their taxes or did not make payments.
Our Harrisburg tax attorneys can help individuals understand complex tax laws and navigate issues that arise from tax offenses. Call Scaringi Law at (717) 775-7195 to discuss your tax-related matters with one of our lawyers.
Estimated Taxes for Self-Employed Individuals
Individuals must pay taxes on income they earn throughout the year. For wage earners, taxes are automatically withheld from their checks. Self-employed individuals must withhold their own taxes by paying an estimated tax quarterly. The estimated tax includes income tax and self-employment taxes. Self-employment taxes refer to Social Security and Medicare costs that an individual is required to cover on their own.
Estimated taxes are calculated by taking into account annual expected adjusted gross income, taxable income, taxes, deductions, and other credits. The IRS provides form 1040-ES to help self-employed individuals determine how much they owe for their estimated taxes.
Self-employed individuals who meet the following criteria are required to pay estimated taxes:
- They expect to owe $1,000 or more for the current year’s taxes
- Whichever is the smaller of the following:
- Their withholdings and refundable credits will be less than 90% of the current year’s tax return; or
- Their withholdings and refundable credits will be less than 100% of the prior year’s return.
How to Pay Estimated Taxes
Individuals can pay their estimated taxes as often as they want – weekly, bi-weekly, monthly – but must ensure they pay enough in taxes by the payment period deadline. The IRS allows for estimated taxes to be paid online, by phone, or by mail.
The due dates for the quarterly payment periods are as follows:
- April 15th for income earned from January 1st through March 31st
- June 15th for income earned from April 1st through May 31st
- September 15th for income earned from June 1st through August 31st
- January 15th (of the following year) for income earned between September 1st and December 31st
If the due date falls on a Saturday, Sunday, or holiday, the payment is considered on time if it is made on the day following the weekend or holiday.
Penalties for Failure to Pay or Underpaying Estimated Taxes
The IRS will penalize individuals who do not pay enough in estimated taxes or fail to pay estimated taxes quarterly. The underpayment penalization is in addition to any taxes owed and the amount depends on how much the individual owes and how far behind they are in making their payments.
It is important, therefore, that self-employed individuals thoroughly document and keep track of information for their business, keep invoices and receipts organized, and know which deductions they qualify for. Tax laws can be confusing and complex, and individuals should seek the help of a skilled lawyer when attempting to apply the law to their situation.
We Provide Assistance with Tax Law Issues
At Scaringi Law, our experienced Harrisburg tax lawyers understand complex tax laws, know how to apply them, and understand the implications if errors are made. We help not only with preparing and filing taxes, but also with any tax issues that may arise. We work hard to ensure you receive a high level of service and sound legal guidance for your unique tax situation.
For help with your tax matters, contact Scaringi Law at (717) 775-7195 or contact us online.