Estimated Taxes-Why Do I Pay Them

Who Pays Them And Why

When you are a small business owner or self-employed you are required to pay these taxes.  When expecting to owe the government $1,000.00 or more at the time you file, you must make estimated tax payments for the current year.  Making these payments every 3-months or quarterly relieves you of coming up with a lump-sum payment at the end of the year at the time you file your annual tax return.  Whether or not you owe taxes for the next year, you may still have to pay estimated taxes.

Wage earners who have business income can avoid making estimated tax payments.  You may have to adjust their W-4 withholding to cover the anticipated business income.  It will be best to do a paycheck checkup.  Use the Tax Withholding Estimator at the IRS.gov website.  When you determine that there is not enough taxes being withheld, make arrangements and adjust your W-4 withholding.  Your employer’s Human Resources or Payroll Departments can assist you with this.

Side Hustles or Gigs

We live in an economy where at times our primary job may not meet our financial needs.  Like many others, you are making side money to fund a special project or pay down on some existing bills.  Remember, all income earned, you are required to report on your income tax return.  Whether or not you are issued a 1099-Misc, don’t get caught under reporting your income.  Hefty penalties and interest are assessed when you are found out.  Remember, our tax system is a voluntary reporting system.

Paid Not Enough Estimated Taxes

Penalties And Interest

When you pay too little of your taxes through withholding, estimated tax payments or the combination, you will be faced with a tax bill.  When that payment is late, you will be assessed penalties and interest on the unpaid amount.  Believe me, it can accumulate to equal or become more than the tax amount owed.  It will not go away, so address your tax debt immediately.  Reach out to your tax professional.

Plan Your Tax Outcome

Tax planning is a year long ongoing process.  Stop looking at it as an event.  Tax preparation results is the culmination of your financial activities throughout the year.  Think proactive when earning and spending your finances.  The goal is eliminate, reduce or defer the tax.