MYTH :
You Don’t Have to Pay Estimated Taxes If You’re Self-Employed
REALITY :
Self-employed individuals must pay estimated taxes quarterly to avoid penalties.
HOW WE KNOW :
IRS rules require self-employed individuals to pay estimated taxes.
KEY TAKEAWAYS :
Estimated Tax Requirements: Self-employed individuals are required to pay estimated taxes quarterly.
Avoiding Penalties: Paying estimated taxes helps avoid penalties and interest for underpayment.
Stay Informed: Understanding the rules for estimated tax payments is crucial for accurate tax filings and financial planning.
One common tax myth is the belief that you don’t have to pay estimated taxes if you’re self-employed. This misconception can lead to significant penalties and interest charges from the IRS. Here's what you need to know to stay compliant and avoid these pitfalls.
Origin of the Myth
Misunderstanding of Tax Obligations: Many people transitioning to self-employment may not fully understand their new tax obligations.
Lack of Awareness: There is often confusion about the requirement to pay taxes throughout the year instead of at the end.
Reality of Paying Estimated Taxes
Quarterly Payments: Self-employed individuals must make estimated tax payments quarterly if they expect to owe at least $1,000 in tax after subtracting withholding and refundable credits.
Self-Employment Tax: This includes income tax and self-employment tax, which covers Social Security and Medicare taxes.
IRS Guidelines on Estimated Taxes
Payment Deadlines: Estimated taxes are generally due on April 15, June 15, September 15, and January 15 of the following year.
Form 1040-ES: Use Form 1040-ES to calculate and pay estimated taxes.
Safe Harbor Rule: To avoid penalties, pay at least 90% of the current year's tax or 100% of the previous year's tax (110% if your AGI was more than $150,000).
Why the Myth Persists
Transition Confusion: Many new self-employed individuals are accustomed to having taxes withheld by an employer and may not realize they need to pay estimated taxes.
Anecdotal Advice: Misleading information and anecdotal advice from non-professional sources perpetuate the myth.
Avoiding the Pitfall
Understand the Requirements: Clearly understand the IRS rules for paying estimated taxes.
Quarterly Payments: Be prepared to make estimated tax payments four times a year.
Calculate Correctly: Use Form 1040-ES to accurately estimate your tax liability.
What You Need to Do
Calculate Estimated Taxes: Use your income, deductions, and credits to estimate your tax liability for the year.
Make Timely Payments: Ensure that you make your estimated tax payments by the quarterly deadlines to avoid penalties.
Consulting a Tax Professional
Seek Professional Advice: Consulting a tax professional can ensure you correctly calculate and pay your estimated taxes.
Accurate Records: A professional can help you maintain proper documentation and navigate the complexities of estimated tax payments.
