Until recently, you may not have considered the idea of being self-employed as a viable possibility. You could have had many reasons that you put off acting as your own boss, and having to handle various financial aspects on your own may have been one of those reasons. True, as a self-employed person, you will need to take different considerations for your taxes into account than if you worked for someone else.
In particular, as a self-employed person, you do not have an employer to withhold your taxes every paycheck. While this may seem ideal at first because you receive payment in full rather than having taxes deducted, you could hurt yourself financially if you do not pay your estimated taxes.
What are estimated taxes?
Though you do not have someone withholding your taxes, you still owe the Internal Revenue Service a portion of your income throughout the year. Typically, self-employed individuals can address this by paying estimated taxes. These payments cover your income tax, self-employment tax and alternative minimum tax. You would pay these taxes on specified dates four times a year. For example, the dates for 2018 that have already passed and are upcoming include the following:
- April 17, 2018
- June 15, 2018
- September 17, 2018
- January 15, 2019
You can find these dates on the Form 1040-ES, which can help you determine your estimated tax amounts.
When do penalties apply?
You may think that you could avoid paying your estimated taxes and simply pay a lump sum after you file your tax return. While you technically could take this approach, it may prove more harmful than beneficial. If you do not pay your estimated taxes or you underestimate your payments, you could face penalties. This possibility means that you will likely have to pay a considerable lump sum depending on your income for the year as well as additional fees for your underpayment.
How can you better understand estimated taxes?
Estimated taxes can understandably seem intimidating. After all, you likely do not have extensive knowledge of tax laws, and while you may feel comfortable with your financial knowledge, you may still wonder whether you have estimated correctly. Fortunately, you do not have to try to handle these taxes on your own. A tax attorney can explain the uses of estimated taxes and advise you how to avoid penalties and help make sure that you pay your taxes correctly throughout the year and when filing time comes.