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Do I Need to Pay Estimated Taxes?

  • 17 January 2017
  • Author: Alexander Carr
  • Number of views: 1936
Do I Need to Pay Estimated Taxes?

We are certainly entering the era of the “gig” economy which, as we’ve covered before, has given each of us the option to earn a little extra cash. Some of us are armchair entrepreneurs, independent contractors or provide a service like driving for Uber or renting out a vacation home online.  For each one of these activities—whether they represent your main income or not—the IRS expects to earn a quarterly portion. This portion is called an estimated tax payment.

Employers are constantly providing the IRS income tax as well as Social Security and Medicare tax payments for employees. When income is earned outside a full-time employment arrangement, it’s up to the individual to pay those taxes on a quarterly basis. This income usually comes from a business-type activity performed by sole proprietors, partners and S corporation shareholders. But it can also come from surprising areas including interest, dividends, gains from the sales of stock or other assets, and alimony.

According to the IRS, you don’t have to pay estimated tax for the current year if you meet all three of the following conditions:

  • You had no tax liability for the prior year.
  • You were a U.S. citizen or resident for the whole year.
  • Your prior tax year covered a 12-month period.

For everyone else who earns income outside of employment (generally more than $1,000 annually), estimated taxes are expected to be paid by submitting Form 1040-ES on these dates: April 15 (Q1), June 15 (Q2), September 15 (Q3) and January 15 (Q4 of the previous year).

The IRS does provide an easy way for employees earning extra income on the side to pay taxes. Those receiving salaries and wages can avoid paying estimated tax by asking their employer to withhold more tax from their main earnings. To do this, file a new Form W-4 (PDF) with your employer, filling out the special line designated for any additional amount you want your employer to withhold.

For specific questions about paying estimated income taxes, contact us.

Image Copyright: alphaspirit / 123RF Stock Photo

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