Hi Mdeleon2010,
Thank you for your questions.
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Taxes are pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.
There are two ways to pay tax:
-Withholding from your pay, your pension or certain government payments, such as Social Security.
-Making quarterly estimated tax payments during the year.
- You make your estimated payments based on the income you expect to earn and any credits you expect to receive in the year. You can use your prior year tax return as a guide. You could also use this helpful link to our Tax Calculator to assist you: Self-Employment Tax Calculators
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The IRS uses a couple of rules to determine if you need to make quarterly estimated tax payments:
- You expect to owe more than $1,000 after subtracting withholding and tax credits when filing your return, or
- You expect your withholding and tax credits to be less than:
- 90% of your estimated tax liability for the current tax year
- 100% of the previous year's tax liability, assuming it covers all 12 months of the calendar year
These are commonly referred to as safe harbor rules. The 100% requirement increases to 110% if your adjusted gross income exceeds $150,000 ($75,000, if you're married and file separately).
- If you've started a new business, it is best to keep financial records to determine your income and business deductions. There will be several factors that can play a role your taxes. The main factor is your accounting treatment. Here is a link that goes into more detail for Startup Business: Starting a New Startup Business
- Typically, underpayment penalties are 5% of the underpaid amount, and they’re capped at 25%. The IRS calculate the amount of the Underpayment of Estimated Tax by Individuals Penalty based on the tax shown on your original return or on a more recent return that you filed on or before the due date. The tax shown on the return is your total tax minus your total refundable credits. There is also a charge of interest on penalties.
- It would depend on the state, but if you underpay in most states, there are penalties as well. It is advised to make estimated tax payments to your state if your state has income taxes.
I hope this cleared up some of your questions.
Thanks!
