If you owe more than $1,000, there is a penalty for not paying estimated taxes. Estimated taxes are not only necessary due to IRS regulations, but makes paying taxes easier than trying to pay a large amount at once.
Estimated taxes are due 4 times a year, Taxes on money earned January through March is due April 15th, money earned April and May have a tax date of June 15th, June through August taxes are due September 15th, and the last four months have a tax date of January 15th of the following year.
How do you know if you owe estimated taxes? There can be several reasons.
You don't have enough withholding from your paycheck. If this is the case, you can have your employer adjust your withholding. You can use the IRS Tax Withholding Estimator to ensure that you are having enough withheld https://www.irs.gov/individuals/tax-withholding-estimator This can happen if you have a change in tax status, if you cannot claim dependents any longer, get bonuses or earn overtime. The IRS withholding estimator can help you understand how much to withhold or meet with your tax preparer.
If you earn money as a 1099 contractor. In this situation, no taxes are withheld from your pay. Generally you will file a schedule C (Profit or Loss From Business) with your taxes so you can subtract deductions (expenses) such as mileage and business use of home (if your office is in your home and used regularly and exclusively for the business).
Remember that if you file schedule C, you will have self employment taxes (reported on schedule SE) on the profit of the business. Self employment tax is not a punishment to the small businesses or contractors. You are paying 15.3% self employment to pay both sides of social security and Medicare. When you work for an employer, you pay 7.65% and your employer pays the other half of 7.65%.
The profit is also reported on your 1040 which means that it is added into your adjusted gross income. Depending on your tax bracket, you are paying tax on the profit of your business along with any other taxable income.
Self employment tax is added on to your tax liability after deductions and credits are figured in. This means that you need to set aside at least 15.3% of your profit for taxes even if you are counting on credits (unless the credits are refundable credits.
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