Do You Have to Pay Quarterly Taxes?
Posted in Taxes
If your employer withholds money each week from your paycheck, then you likely don’t have to think about making quarterly tax payments. However, for those of us who are self-employed or receive income in the form of interests, dividends, rent, alimony, gains from the sale of assets, prizes or awards, it may be necessary to make quarterly estimated tax payments to the IRS. Understanding who does and does not need to pay quarterly taxes—and determining the appropriate payment amount—is the best way to protect your bank account from steep penalties at tax time.
Who Needs to Pay Estimated Taxes?
Paying taxes is always stressful, and the process can become even more aggravating when you’re self-employed. To avoid penalties, it’s essential that you determine whether or not you must pay estimated taxes each quarter. In general, individuals who expect to owe less than $1,000 in taxes, after subtracting federal income tax, are exempt from making quarterly payments. Similarly, if your federal tax withholdings comprise 90% of the tax you owe for the year, you can most likely refrain from making payments each quarter. For the remaining self-employed workers, quarterly payments are necessary to satisfy your responsibility to the IRS and avoid monetary penalties.
Both individuals and corporations must make estimated tax payments throughout the year. Whether you’re filing as a sole proprietor, a partner, a self-employed person or a shareholder, if you expect to owe $1,000 or more (for corporations, it’s $500 or more), you will likely have to make payments each quarter. Additionally, those individuals and businesses with tax liability for last year will likely need to make estimated payments for
this year as well.
Occasionally, contract employees get in trouble for failing to make estimated quarterly payments. Because contract employees receive regular checks from their employers, they may mistakenly believe that taxes are being withheld. However, the truth is that contractors are self-employed and must make estimated tax payments to avoid penalties at the end of the year.
If you’re an individual worker who receives a Form 1099 from your employer, you are most likely required to file quarterly tax payments with the IRS. Known as an “Information Returns Form,” the Form 1099 provides the IRS with a record of your income for the year. If you’re a freelancer, you may have multiple Forms 1099 from various employers, and it’s important to take them all into account when calculating estimated payments. Individuals may also receive Forms 1099 if they own stocks or mutual funds. Known as Forms 1099-DIV. these must be taken into account when estimating your quarterly payment.
Other IRS forms are required for different types of business entities. If you file as a sole proprietor, partner, S corp. shareholder and/or a self-employed person, you must use IRS Form 1040-ES to file estimated taxes. For other types of corporations, a Form 1120-W must be used to file their taxes.
What Are the Consequences of Failing to Pay?
Failure to make estimated quarterly tax payments will likely result in penalties for both individuals and businesses. Parties can be fined for failing to make sufficient payments or not filing payments on time. Typically, the penalty is 5% for each month that a tax return is late, but the penalty cannot exceed 25% of the total payment due.Source: quickbooks.intuit.com