Should I be paying estimated taxes
Updated: Dec 6, 2022
Estimated tax is the way you pay the IRS and the State income tax on the income you earn throughout the tax year. It is the amount of tax you are responsible for paying. It is important to pay the estimated tax evenly throughout the year rather than waiting to April 15 in order to manage underpayment penalties and interest.
Are you an employee whose earnings are reported on a W-2? If yes, then you can withhold through your employer and estimated taxes are most likely not required. To ensure you are withholding the correct amount for tax time: Check the IRS tax withholding estimator.
What if I have a self-employed side business? You can still withhold through your employer by adding an extra amount withheld each pay period to your W-4 and state tax withholding forms completed each year for your employer.
If you are self employed or a equity owner in a business as your main income producing activity; then you will most likely need to make estimated tax payments. The IRS requires tax on earned income to be paid evenly throughout the year. The timely filed and paid quarterly estimates accomplishes satisfies this requirement.
Estimated tax can be figured two ways. The safe harbor method calculates estimates for the next year based on the current year income, deductions and tax liability. Paying the safe harbor payments as calculated serves to avoid underpayment penalties. Estimates can also be prepared from tax projections. If you expect your income to go up estimates can be
prepared based on the current year plus the projection for increased earnings. This method gets you closer to your actual tax liability at tax time if the projection estimates are accurate.
On request, we will review our client’s income tax situation mid-year and again at the end of the year to ensure they are on target to avoid a huge tax bill at tax time.Our clients can choose either method of calculating estimates and request meetings that best fit their business needs.