Are you withholding taxes at any source?
Does your Form 1099- NEC show Federal income tax withheld?
I your income is rising you may be falling under a safe harbor where your tax withheld exceeds the prior year tax liability.
If none of the above is true, are you seeing an underpayment penalty on your tax return each year?
If you have been incurring an underpayment penalty, I recommend the following cook book:
- Set a time each month for your "Board Meeting"
- For example, third Sunday of the month 4 PM to 5:30 PM
- Keep track of your revenue and expenses in a file folder
- The major miss for self-employed taxpayers is failure to track expenses
- At the end of each month, total up your profit
- You will owe 15.3% self employment tax on the profit
- You will also owe income tax on the profit, most likely at your Marginal Tax Rate
- You can locate your Marginal Tax Rate at the bottom of your 2022 Tax History Report in TurboTax
- So if you are in a 12% marginal tax bracket, you add 12% plus 15.3% and deposit 27.3% of your profit in accordance with IRS "When to Pay Estimated Tax":
January 1 through March 31 period, make deposit on April 15
April 1 through May 31 period, make deposit June 15
June 1 through August 31, make deposit September 15
September 1 through December 31, make deposit January 15
The amount of estimated tax penalty is usually the deciding factor as to whether or not to make estimated tax payments. For some a $50 penalty might not be worth the paperwork. For others, it certainly would not be. Everyone has a different penalty tolerance. The only incentive to file and pay estimated taxes is to avoid the penalty.
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The law requires you to make quarterly estimated payments, and there can be penalties and interest if you don't make the payments on time. You don't "file" a separate quarterly tax return, you just make a payment. There is a worksheet you can use to figure out the estimated payment you owe, and it looks like a tax return in some ways, but you don't actually file it. All you have to do is make the payments on time. And these days, there are program like Quickbooks to help you estimate the correct payment amount.
You only file one tax return at the end of the year. If your estimated payments are more than you owe, you get a refund. If your estimated payments are less than your tax, you will owe an additional amount when you file.
If you have been making payments, that's all you need to do. If you have not been making payments, there can be penalties when you file your tax return, even if you pay in full when you file.
Do you usually end up paying a big tax due in April? Are you filling out Schedule C for your self employment?
You must make quarterly estimated tax payments for the current tax year if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.
- 2. You expect your withholding and credits to be less than the smaller of:
90% of the tax to be shown on your current year’s tax return, or
100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)
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