Do You Owe Estimated Taxes? You Might Be Surprised
Estimated income taxes aren’t just for the self-employed. You may need to pay them for 2024.
If you’ve been self-employed for years, you know the drill. Since income taxes aren’t generally withheld from your pay, the IRS expects you to estimate your taxable income four times every year and make payments to the agency based on that number. Sole proprietors, even those who only work a side gig or two, are expected to pay estimated taxes if they anticipate owing $1,000 or more.
But they’re not the only ones. The IRS often expects estimated payment from workers who have a tax bill at filing time. This can happen for a number of reasons, including:
● Not having enough withheld from your paycheck as a W-2 employee
● Receiving sizeable interest payments and/or dividends
● Winning a monetary prize or award, or hitting it big gambling
● Having to report capital gains
It’s important to complete your W-4 completely and accurately when you start a new job so your employer knows how much should be withheld from each paycheck.
Tip: If you’re a W-2 employee and you’re getting large refunds, we recommend you contact your payroll manager and amend your original Form W-4 so less is being withheld. On the other hand, if you have a big tax bill at filing time, you’ll want to have more withheld.
It’s not uncommon to be a W-2 employee and still have to submit estimated taxes, for any of the reasons listed above. Some problems can be solved through W-4 adjustments, but sometimes you have to kick in an extra payment – or four.
Who Doesn’t Have to Pay Estimated Taxes?
According to the IRS, a lot of people are expected to pay estimated taxes. The only ones who don’t are those for whom these three conditions are true:
● You had no tax liability for the prior year,
● You were a U.S. citizen or resident alien for the whole year, and,
● Your prior tax year covered a 12-month period.
How Do You Estimate Quarterly Taxes?
While anyone can owe estimated taxes, self-employed workers have the most challenging job in determining how much they must pay because it often involves all of their income. And it’s not an easy task. You’re really just making an educated guess, based on the income you’re bringing in during the quarter and the deductions and credits you may be able to claim.
Keep in mind, too, that Congress can make changes to the tax code up until December 31 of the tax year. It’s hard to factor that in early in the year.
Our suggestion is that you keep extraordinarily detailed records. Track your business expenses to the penny using a spreadsheet or a financial application. At the very least, keep all of your receipts and other documentation in file folders, either physical or digital ones. The IRS website contains an estimated tax worksheet that can help, but it’s still a Herculean task.
The IRS website offers a worksheet to help you calculate estimated taxes. You may find it easier and more accurate to work with us on this complex chore.
Keep in mind, too, that you will also owe a self-employment tax – that portion of your income taxes that employers normally pay. This can be a large sum.
If you’ve been through at least one tax cycle that required estimated taxes, it will be easier the second year. But if you’re new to this, or your estimates for the previous year were way off, you might want our help. We can even take over some of your bookkeeping to help keep things organized.
How Do You Pay Estimated Taxes?
Here are the due dates for estimated taxes in 2024. You can pay all of your estimated tax by April 15, 2024, or in four equal amounts by the dates shown below.
1st payment ................. April 15, 2024
2nd payment ................ June 17, 2024
3rd payment ................. Sept. 16, 2024
4th payment ................. Jan. 15, 2025
There are numerous ways you can submit your payments. There are tax vouchers that you can print and mail in with a check or money order at the bottom of this IRS page. You can also pay through an online bank account, credit or debit card, or even a digital wallet here. You can pay by phone (888-729-1040) or through the Electronic Federal Tax Payment System (EFTPS). To pay through your mobile device, download the IRS2Go app.
What Happens If You Don’t Pay Estimated Taxes?
You guessed it. The IRS can assess penalties and interest.
Estimated taxes are complicated. On top of that, you may also be on the hook for state estimated taxes. We’d be happy to work with you in whatever capacity you need to take on this complex but necessary task. Contact us as soon as you know you need help, and we’ll set up a meeting to get started.
