Many employers withhold taxes from every paycheck, but freelancers, self-employed workers, small business owners, investors and others pay on their own via quarterly estimated tax payments.
Typically, you must make quarterly estimated payments if you’re expecting an annual tax liability of $1,000 or more. Last week, the IRS reminded filers that these payments can help “avoid a surprise at tax time.”
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“Estimated tax payments are crucial for meeting tax obligations throughout the year, avoiding penalties and staying on top of your finances,” said Sean Lovison, a Philadelphia-area certified financial planner with WJL Financial Advisors. He is also a certified public accountant.
It’s important to calculate tax payments accurately, pay on time and to consider meeting the “safe harbor” rule to avoid underpayment penalties, Lovison said.
“Keep records, monitor your tax situation, and seek professional guidance for a smooth tax experience,” he said.
Meet the ‘safe harbor’ requirements
Since the U.S. tax system is “pay-as-you-go,” you may face penalties for not staying current, said CFP Kathleen Kenealy, founder of Katapult Financial Planning in Woburn, Massachusetts.
If you miss any of the four estimated tax payment deadlines for 2023 — April 18, June 15, Sept. 15 or Jan. 16, 2024 — you’ll incur a late penalty of 0.5% of your unpaid balance per month or partial month, up to 25%, plus interest.
However, the IRS has a “safe harbor” to avoid underpayment penalties, Kenealy explained. You meet the requirements by paying at least 90% of the current year’s tax liability or 100% of last year’s taxes, whichever is smaller.
But the rule is “a little different for high-income taxpayers,” she said. If your 2022 adjusted gross income was $150,000 or more, you need to pay the lower of 90% of the current year’s tax liability or 110% of last year’s taxes to meet the safe harbor requirement for 2023. Adjusted gross income can be found on line 11 of your 2022 tax return.
How to make estimated tax payments
Electronic payments are the “easiest, fastest and most secure” option for estimated tax payments, according to the IRS.
Online options include payments through your online account, via Direct Pay, the Electronic Federal Tax Payment System and more. However, you’ll incur a fee for debit and credit card payments. You can learn more about how to make payments here.
Original news source Credit: www.cnbc.com