There can be some confusion on who needs to pay estimated taxes and who does not. The basic rule is that if the IRS does not receive enough tax from you or from your employer on your behalf through the year, you need to pay estimated tax payments to avoid being assessed a penalty.
Employees receive a Form W-2 during tax time pay federal taxes on their income through their employer withholding funds from their paycheck. That employer is responsible for submitting that withholding amount to the IRS. For self-employed individuals that are paid without having taxes withheld, you receive a Form-1099 at the end of the year. You are considered an independent contractor. You are required to make estimated tax payments since you are not submitting any income tax throughout the year another way.
Taxpayers should make estimated tax payments if:
- The tax withheld from their income does not cover their tax for the year.
- They have income without withholdings. Some examples are interest, dividends, alimony, self-employment income, capital gains, prizes or awards.
Here are five actions taxpayers can take to avoid a large bill and estimated tax penalties when they file their return. They can:
- Use Form 1040-ES. Individuals, sole proprietors, partners and S corporation shareholders can use this form to figure estimated tax. This form helps someone calculate their expected income, taxes, deductions and credits for the year. They can then figure their estimated tax payments.
- Use the Withholding Calculator on IRS.gov. This tool helps users figure how much money their employer should withhold from their pay so they don’t have too much or too little tax withheld. The results from the calculator can also help them fill out their Form W-4. Taxpayers whose income isn’t paid evenly throughout the year, can check Publication 505 instead of the calculator.
- Have more tax withheld. Taxpayers with a regular paycheck can have more tax withheld from it. To do this, they must fill out a new Form W-4 and give it to their employer. This is a good option for taxpayers who participate in a sharing economy activity as a side job or part-time business.
- Use estimated payments to pay other taxes. Self-employed individuals can make estimated tax payments to pay both income tax and self-employment tax. Self-employment tax includes Social Security and Medicare.
- Use Form W-4P. Generally, pension and annuity plans withhold tax from retirees’ payments. Recipients of these payments can adjust their withholding using Form W-4P and give it to their payer
If you are an independent contractor such as a truck driver, construction worker, consultant, delivery driver, rideshare driver, etc., and you were not aware of how estimated taxes work, you may already be in jeapoardy with the IRS. Consult a settlement officer at Republic Tax Relief today and they can conduct a free interview to find out if we can help you get back on track with the IRS.