This includes freelancers and business owners.
If you've never been self-employed, or you're new to freelancing or working as an independent contractor, it might be news to you that income taxes (and some others) in the US are actually not all paid at the end of the year. If you've always been an employee of a company, receiving a W-2 at the end of the year, you've had your income taxes, Social Security Taxes and Medicare taxes deducted automatically from your paychecks. What you don't know is that every quarter, your employer pays quarterly taxes to the IRS.
As a freelancer, you are your own employer, so you need to worry about paying your own taxes by the IRS 2022 estimated tax dates. But you also need to estimate what you owe based on your previous earnings. For this, you can use the IRS Form 1040-ES.
Missing an estimated tax payment or paying late can lead to estimated tax penalties in the form of fines and interest charges. Even if you are owed a refund when you file your annual tax return, the IRS can still charge you these fees.
These penalty amounts can add up fast for IRS estimated taxes because of interest on unpaid taxes. If you were making deliveries for Grubhub and Postmates for the last two years, for example, but this year you forgot to make your second quarterly tax payment by the April 18 deadline, you would have to pay a penalty.
If you were to use an estimated tax calculator to figure out that you owed $600 by April 18, you could use an IRS interest and penalty calculator to find out what you owe with the penalty. Interest is .5% of that original amount for each month you don't pay in full, so you'll owe $603 until May 18 when the interest will be compounded again. An IRS Form 2210 can also help you figure out how much you owe.
There’s a thought looming in every taxpayer’s mind: what is the penalty for underpayment of estimated tax? Well, the IRS can slap you with an underpayment penalty if you pay on time, but you fail to make the full estimated tax payments. This doesn't apply to you if you owe less than $1,000 in tax after withholdings and credits. Two ways to know if you have paid enough in estimated taxes are if you have paid at least 90% of the tax you will end up owing by the end of the current year, or you have paid 100% of the tax shown on last year's annual tax return.
This form is essentially a simple worksheet that helps you calculate the IRS penalty amount by hand. You'll need to complete and include it with your tax return at the end of the year. Form 2210 instructions can be found on the IRS website, along with other information about paying estimated taxes, including the IRS 2022 estimated tax dates.
Underpayment penalties are calculated by the IRS based on:
What happens, for example, if your income tax obligation for the previous tax year was $4,000, but you knew you were making more than last year, so this year you paid $4,500. It turns out you made even more than you expected, and your income tax obligation ends up being $6,000. Since you withheld more than the prior tax year’s income tax obligation, you won't have to pay underpayment penalties (yaay!). But, if you made estimated tax payments that were less than your previous year’s income tax, you will have to pay an underpayment penalty. Here's where you can use the underpayment penalty calculator to figure out your penalty for not paying estimated taxes.
This estimated tax penalty is charged when you fail to pay your taxes by the due date.
You can be charged with this penalty if you file the returns after the due date without a reasonable cause. Both the failure-to-file and failure-to-pay penalties are incurred after the due date of your tax return, while the late payment penalty IRS fee for quarterly estimated tax payments is incurred throughout the year.
If both a failure-to-file and a failure-to-pay penalty are applicable in the same month, the combined penalty for underpayment of estimated tax is 5% (4.5% late filing and 0.5% late payment) for each month that your return was late, up to 25%.
If more than 60 days have passed and you have not filed, the minimum penalty is either $435 (for tax returns with a due date after December 31, 2019) or 100% of the tax required to be shown on the return, whichever is smaller.
To figure out your penalty amount, you can rely on FlyFin’s IRS penalty calculator to help determine how much you owe Uncle Sam. To use the IRS interest and penalty calculator, you'll need to provide:
Even if you end up paying a tax penalty, there are other ways you can save money. Tax deductions can help lower your tax liability and reduce the overall amount of taxes you’ll owe. There are two ways to take deductions: the standard deduction or itemized deductions.
If you work from home and consider it your primary workplace, you can take advantage of deductions, including the home office deduction, the internet and phone deduction, the home office expense deduction or even the rent tax deduction. Tax deductions are a great way to save on taxes.