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If you have a traditional hourly or salaried job, your employer likely withholds income taxes from every paycheck. But if you're among the millions of small business owners, freelancers, gig workers and other self-employed taxpayers, there is no automatic mechanism for withholding your taxes. But, that doesn't mean you won't owe them come
Instead, anyone making income that isn't taxed should pay estimated taxes throughout the year. This will minimize your financial burden come tax day and also help you avoid IRS penalties.
The estimated-tax filing process is a bit complicated, but we've included detailed information below to help guide you through it. For more, here's, how to and for 2022.
What are estimated taxes?
If you earn or receive income that isn't subject to federal withholding taxes throughout the year -- side hustle earnings or income from a rental property, for example -- you'll pay as you go with estimated taxes. Estimated tax is a quarterly payment based on your income for the period. Essentially, estimated tax allows you to prepay a portion of your income tax every few months to avoid paying a lump sum on Tax Day.
Who has to pay estimated taxes?
If you filled out the IRS W-4 form, which provides directions for your employer about how much to withhold from each paycheck, you might not need to pay estimated taxes. If you aren't a W-4 salaried employee, however, you probably need to keep estimated tax payments on your radar. According to the IRS, you must pay estimated taxes if you expect to earn at least $1,000 in 2021 and your employment type falls into one of these categories:
- Independent contractor or freelancer
- Sole proprietor
- S corporation shareholder
There are other sources of income that fall under the estimated tax umbrella, including:
- Dividends and interest earned from investment sales
- Royalties for past work
- Landlord rental income
- Unemployment benefits
- Retirement benefits
- Social Security benefits, if you have other sources of income
- Prizes and awards
You may also need to pay estimated tax as a full-time employee if your employer isn't withholding enough from your salary. To update your W-4 with the correct withholding amount, use the IRS Tax WIthholding Estimator tool, complete a new W-4, Employee's Withholding Allowance Certificate form and submit it to your employer.
Estimated taxes are due, regardless of whether you're paid by direct deposit, check or digital payment services like PayPal, CashApp, Zelle or Venmo. Note: While you should be paying taxes on that income already, a new rule under the American Rescue Plan requires third-party payment networks to report $600 or more payments to the IRS.
When are estimated taxes due?
Estimated taxes are paid quarterly, usually on the 15th day of April, June, September and January of the following year. One notable exception is when the 15th falls on a legal holiday or a weekend. In those cases, you must file your return by the next workday.
The deadlines for 2022 estimated taxes are in the table below.
Estimated tax deadlines
|Earning period||Taxes due|
|Sept. 1 to Dec. 31, 2021||Jan. 18, 2022|
|Jan. 1 to March 31, 2022||April 18, 2022|
|April 1 to May 31, 2022||June 15, 2022|
|June 1 to Aug. 31, 2022||Sept. 15, 2022|
|Sept. 1 to Dec. 31, 2022||Jan. 16, 2023|
How do I calculate estimated tax payments?
There are a few ways to calculate your quarterly tax payments depending on your business model and annual earnings.
- If you earn a steady income, estimate the tax you'll owe for the year and send one-fourth to the IRS each quarter. For instance, let's say you'll earn $80,000, which places you in the 22% marginal tax bracket. You'll owe $17,600 in federal taxes or $4,400 each quarter in 2022.
- If your income varies throughout the year, you can estimate your tax burden based on your income and deductions in the previous quarter. The IRS Estimated Tax Worksheet can help you do the math.
If you've overestimated your earnings at the end of the year, you can complete a 1040-ES form to receive a refund or apply your overpayment to future quarterly taxes. If you underpaid, the form can help you calculate what you still owe.
How do I pay my estimated taxes?
When filing your estimated taxes, use the 1040-ES IRS tax form or the 1120-W form if you're filing as a corporation. You can fill out the form manually with the help of the included worksheets, or you can rely on your favorite tax software or tax adviser to walk you through the process and get the job done. From there, you can pay your federal taxes by mail or online through the IRS website. You'll also find a complete list of accepted payment methods and options, including installment plans.
Do I also have to pay estimated state taxes?
It depends. If you live in one of the few US states with no income tax, your responsibility ends with the estimated federal taxes we've discussed. However, if your state does levy income taxes, you will make estimated tax payments using the same deadlines for federal taxes. Visit your state's department of revenue website or consult your tax adviser or tax software service for more personalized information.
What are the penalties if I don't pay my estimated taxes?
It's a good idea to post a calendar reminder as the quarterly deadline approaches to avoid paying a late penalty. You may be charged a penalty if:
- You forgot to pay estimated taxes or your payment was for less than 90% of the tax amount owed.
- In some cases, you overpaid.
If you want to delve further into estimated tax penalties and conditions of a waiver, see the instructions in IRS form 2210.
Can I avoid paying estimated taxes?
Probably not without incurring those penalties. Some classes of workers -- particularly those whoseis exceptionally modest, inconsistent or seasonal -- are exempt from having to make quarterly payments to Uncle Sam, however:
- If your net earnings were $400 or less for the quarter, you don't have to pay estimated taxes -- but you still have to file a tax return even if no taxes are due.
- If you were a US citizen or resident alien for all of 2020, your total tax was zero and you didn't have to file an income tax return
- If your income fluctuates drastically throughout the year (if you run a seasonal business, for instance), you may be able to lower or eliminate your estimated tax payments with an annualized income installment method. Refer to the IRS's 2-7 worksheet to see if you qualify.