It's Not Just Tax Returns That Are Due on April 18. Be Mindful of This IRS Deadline
- If you're self-employed, you're required to make estimated tax payments on your income quarterly.
- The first of those payments is due the same date as your 2021 tax return.
If you're self-employed, consider this your wakeup call.
At this point, a lot of people are more than aware that 2021 tax returns are due within a week. In fact, this year, filers get a few extra days to submit their taxes, since the deadline was pushed back from April 15 to April 18.
But if you're self-employed, it's not just your tax return you'll need to submit by April 18. You'll also need to submit your first estimated quarterly tax payment. And if you're late with that money, you could end up facing costly penalties from the IRS.
You need to pay as you go
Salaried workers commonly have taxes withheld from their paychecks. But self-employed workers aren't taxed on their wages. And so if you're self-employed, it's on you to pay the IRS a portion of your earnings each quarter of the year.
Why can't you just wait until the next tax season and settle up then? It's simple. The IRS requires you to pay as you go, so to speak. And so you're required to pay taxes on your income on a quarterly basis.
If you don't make your estimated payments on time, the IRS will penalize you for being late. Just as those who don't settle their 2021 tax debts by the filing deadline face a late payment penalty of 0.5% per month or partial month they're late, you will also face a similar penalty if you aren't timely with your estimated quarterly payments.
What if you pay the wrong amount?
There are tools online that can help you calculate what your estimated quarterly tax payments should look like. Or, you can hire an accountant to calculate that number for you.
But it may not be totally accurate. There are different variables that will come into play to determine what your total 2022 tax bill will look like. After all, you're not just liable for taxes on your earnings from a job. You will also have to pay taxes on interest you earn in your savings account and capital gains in your brokerage account.
You may also be eligible for certain tax deductions that lower your tax liability. If you're self-employed, you can deduct business expenses that include travel, equipment, and office supplies, as a few examples. The amount of your deductions will impact the amount of money you owe.
Your best bet, therefore, is to make those estimated quarterly payments, but don't sweat it if they're not 100% accurate. As long as you pay enough to cover 90% of your tax liability this year, you won't be penalized for an underpayment. You will, however, have to catch up by next year's tax-filing deadline and pay the IRS what you owe by that date.
So, let's say you make estimated quarterly payments of $5,000 each this year, for a total of $20,000. If your total tax bill for 2022 ends up being $22,000, you won't be penalized for underpaying the IRS because you'll have paid 90% of what you owe. You will, however, have to come up with that additional $2,000 by next year's filing deadline.
Don't be late
Tempting as it may be to skip out on an estimated tax payment, doing so could mean incurring penalties you can't afford or don't want to be charged. So as you gear up to finalize your 2021 tax return, make sure to get your first estimated tax payment in at the same time.
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