Avoid a Surprise Tax Bill By Paying Your Estimated Taxes Now
With tax season’s arrival, it is crucial for individuals who do not have taxes automatically withheld—or those who have additional income not subject to withholding—to take heed of estimated tax payments. This move can help avert an unexpected tax bill and potential penalties at the end of the year.
Estimated tax is the method used to pay tax on income that is not subject to withholding. This may include earnings from self-employment, business earnings, dividends, interest, rents, and alimony among others. The IRS expects payment quarterly: April 15th, June 15th, September 15th, and January 15th of the following year.
Making accurate payments regularly ensures that you don’t face a hefty sum during the annual April deadline. To figure out your estimated tax, you have to calculate your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.
One common pitfall for many is not accounting for windfalls such as stock market gains in brokerage accounts—which are also subject to these payments. Similarly, participants in the gig economy or those undertaking side-hustles may overlook the need to pay estimated taxes on this income stream.
The Internal Revenue Service provides forms like 1040-ES for calculating and paying these taxes. There are also several electronic payment options available to streamline this process.
Proper financial planning involves diligence with estimated taxes. It can not only provide peace of mind but also allows you to manage cash flows intelligently throughout the fiscal year. Failure to pay the correct amounts can result in underpayment penalties—further straining your finances.
Taxpayers would do well to use available tools and consult with a tax advisor if unsure about their obligations. Timely and accurate payment of estimated taxes shields you from surprises and enables compliance with taxation laws—ultimately safeguarding your financial health.