Death and taxes – the only two things in the world that are certain. And when it comes to taxes, you can be certain that Uncle Sam will give you trouble if you do not pay your taxes on time.
Now, we all know that we need to “true up” what we owe in taxes with Uncle Sam once every year (this year, of course because of the pandemic, we had a little extra time to make peace with the IRS). However, did you know that if you pay Uncle Sam too little during the year, you will face a penalty as well?
It’s true. It may come as a surprise to some, but if you underpay your taxes during the year by too much, then you will pay a penalty for not giving enough to the IRS in the time between each annual tax day. Of course, many of us are salaried employees. So, the tax withholding is done automatically by your employer with each paycheck. However, as the economy becomes more and more about freelancers and independent contractors, those individuals need to get wise about a concept called estimated taxes.
If you are your own boss and do not have an employer to withhold tax money for you, then you need to estimate the tax you owe during the year and pay the estimate quarterly.
In this article, we are going to discuss the details of estimated taxes, and about the consequences if you do not pay the estimated taxes you owe.
If, after reading this article, you would like to have additional information about how to deal with taxes as a freelancer or independent contractor, we invite you to call the business tax attorney of Florida, Mary E. King, P.L. The Law Office of Mary E. King, P.L. can make sure that your tax issues are resolved efficiently and at the lowest cost to you. Please fill out our online contact form, or call us at 941-906-7585 today.
What is the Estimated Tax?
Taxes are not only to be paid once per year. Rather, taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the taxes withheld during the year is not enough, or if you obtain income that does not normally have taxes regularly taken out, such as:
2. Self-employment income
3. Interest and Dividends
4. Capital Gains
5. Awards or Prizes
then you likely will need to pay estimated taxes.
People who are in business for themselves typically will need to pay estimated taxes. It is important to note that estimated tax is not only for income tax, but also covers self-employment tax and the alternative minimum tax.
Should you fail to pay estimated taxes, or fail to pay on time, then you may have to pay a penalty.
So, let’s begin by talking about who does, and who does not need to pay estimated taxes every quarter.
Who Is Required to Pay an Estimated Tax?
Generally, the following types of people need to pay estimated taxes:
2. Sole proprietors,
3. Partners in a business, and
4. S corporation shareholders
If they expect to owe more than $1,000 in taxes when their annual return is filed.
Corporations, on the other hand, generally need to pay estimated taxes if they expect to owe more than $500 come tax time.
Who is Not Required to Pay an Estimated Tax?
If you are someone who receives a wage from an employer, then you can skip paying estimated taxes as long as you have your employer withhold more tax from your earnings. You officially ask your employer to withhold tax from your earnings by filling out a W-4 form.
Here are the three criteria that you need to meet in order to avoid paying estimated tax during the year:
1. You had no tax liability for the prior year,
2. You were a U.S. citizen or legal resident the entire year, and
3. Your prior tax year covered a 12-month period.
When Do You Need to Pay Estimated Taxes?
As noted previously, you need to pay your estimated taxes quarterly. That means that you need to pay by April 15th for the first quarter of the year (January 1 to March 31); by June 15th for the second quarter of the year (April 1 to May 31); by September 15 for the third quarter of the year (June 1 to August 31); and by January 15 of the following year for the fourth quarter (September 1 to December 31).
(Note: If those due dates fall on a weekend or holiday, then the estimated tax is due the next business day.)
What is the Penalty for Underpaying Your Estimated Tax?
There is unfortunately, no hard and fast number when it comes to the penalty for failing to pay your estimated tax, or for paying late. You need to use Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts) to calculate the penalty. (Form 2220 covers corporations).
Let an Experienced Business Tax Attorney in Florida Help You with Estimated Taxes for Your Independent Contractor Business
Taxes can be a challenge for freelancers because there is so much more self-reporting you need to manage. That could result in being an IRS target for an audit.
In the event of an audit, you need to talk to a business tax attorney in Florida who can help. Mary E. King has spent her career concentrating in tax law and can help you with tax audits in Florida and elsewhere. Attorney King has a wealth of information about what types of options would make the most sense for you and your business.
That helps explain why she’s received an A+ rating from the Florida Better Business Bureau. If you have a tax related issue – no matter how small or how large – setting up an initial consultation with Mary E. King, tax attorney of Florida, is the first step you should take towards relief.
The Law Office of Mary King P.L. offers complete IRS problem solving services including all areas from tax debt settlement to planning the most efficient tax strategy for individuals and businesses. Call us today to schedule an initial consultation. With years of experience as a tax attorney in Florida for many clients, Attorney Mary E. King can make sure that your tax issues are resolved in your favor. Fill out our online contact form, or call us at 941-906-7585. Remember, at the Law Office of Mary E. King, we are focused on solving your tax issues for good.