Posted on: 13 July 2017
If you're making money regularly as a self-employed person, then you have probably heard of something called "estimated taxes." These are taxes which self-employed people pay per quarter throughout the year. Most non-self-employed people have their taxes taken out with each paycheck. Quarterly estimated taxes is basically a self-employed person's version of this. If you are making more than $400 in self-employment income, then you also must pay self-employment taxes. However, just because you're self-employed and must pay self-employment tax, it doesn't necessarily mean you have to pay estimated taxes.
Who needs to pay estimated taxes?
People who expect to owe more than $1000 at tax time must pay estimated taxes or face penalties. However, if you have another job which withholds at least 90% of this year's tax liability or 100% or last year's liability (or 110% if you are making more than 75,000 for single and $150,000 for married), then you will not need to pay estimated taxes. You also don't need to make estimated tax penalties if you had no tax liability the previous year. See this Internal Revenue Service web page for more details.
How are quarterly taxes determined?
It can be extremely tricky to determine your quarterly taxes especially if your income varies widely throughout the year or you don't expect to make the same amount each year. There are calculators which can help you figure out how much you should pay during the year. Use your last year's tax and income as a base and try to predict what you will be making during the current year. You can either pay even quarterly amounts, or pay according to what you actually make each quarter. The latter method is very helpful if your income is erratic. However, it can get extremely complicated at the end of the year as you might have to fill out extra paperwork to avoid possible under-reporting penalties.
If you overestimate your payments, then you will be able to apply the excess to your next year's taxes. If you underpay your estimated taxes, then you will owe money at tax time. You could also pay a penalty if you underestimated your tax liability during the year by a substantial amount or if you were late on any payments during the year. Fortunately, a professional tax preparer is well versed on estimated taxes and can help you figure out how much you should pay so that you're not paying too much, yet are underpaying so much that you will owe penalties. When dealing with estimated taxes, contact a professional who can get you started.
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