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What Exactly Are Estimated Payments?

by Cameron James Connor
Estimated Payments

Unlike those who work as employees of an organization that deducts revenue from each payment, you, as a freelance contractor or company owner, are responsible for making sure that you pay the proper taxes to the government. You anticipate paying estimated taxes on any salary that is not subject to withholding, as well as any additional income like dividends, interest, and capital gains. Make sure you don’t make any major mistakes, and consider consulting a tax adviser to determine your expected taxes and payments for 2022.  

Do I Have to Make Estimated Payments in 2022?  

As a freelancer,  you will need to make projected payments in 2022. Estimated taxes are used to pay income tax and additional taxes like the self-employment tax.. If not enough withholding tax is paid or you underpay, you risk receiving a penalty.  

What Do Estimated Tax Payments Entail?  

Individuals whose incomes are not subject to withholding taxes make estimated quarterly payments to the Internal Revenue Service (IRS). People are required to pay taxes on all forms of income, including interest, earnings, dividends, and rent. Without a doubt, employers withhold taxes from regular employees’ earnings and submit them to the tax authority . However, self-employed people and business owners must determine how much tax they pay, as well as how much they put in.  

More Information Regarding Estimated Tax Payments  

Depending on the W-4 forms that employees fill out, a corporation may withhold taxes from employees’ paychecks. Others must pay these amounts directly to the government as estimated taxes, instead of paying it at the end of the year with their tax return.  

Taxpayers include people who work for themselves, independent contractors, capital investors who generate dividend income and capital gains, shareowners who receive interest income, authors who receive royalties for their work, and property owners who receive rental income. They should determine the amount of back taxes they owe the government and pay it.  

Retirement benefits, taxable unemployment compensation, and any taxable portion of social security gains are additional income-based situations where anticipated tax is applicable.  

In general, estimated taxes are paid out once every three months. 

The first quarter comprises the three months of the calendar starting on January 1 and ending on March 31. The next quarter runs from April 1 to May 31, and is only two months long. The third lasts for 3 months, from June 1 to August 31, while the fourth covers the last 4 months of the year. These partial payments are typically due on April 15, June 15, and September 15 of the current year and on January 15 of the following year.  

Penalties and interest are checked next to the outstanding amount if the estimated taxes paid do not cover approximately 90% of the taxpayer’s substantial tax liability (or 100% or 110% of the taxpayer’s previous-year liability, depending on the point of adjusted gross income (AGI)).  

If the net income of an individual filer is less than $400, no tax is required. An anticipated tax should be paid on the entire amount if their net income exceeds $400. Even if a person earns less than $400, they still need to submit a tax return if they meet the requirements. 

How to Calculate Your Estimated Tax Burden  

If you are paying your taxes up front, it might be challenging to predict how much you will owe in anticipated taxes. Self-employment taxes, which are now fixed at 15.3%, are in addition to federal taxes that self-employed people must pay. The taxes you would have typically withheld for social security at 12.4% and Medicare at 2.9% are covered by self-employment taxes.  

Additionally, you must total your deductions. These lessen your taxable income. From there, you can split any credits to which you are entitled. Flyfin can assist you with the calculations if you have no idea where to start. A 1099 tax calculator can help too. 

Making Quarterly Tax Payments  

In general, if you owe taxes, you must pay them by the April filing date (April 18 in 2022) in order to make sure you don’t get a penalty. However, with projected taxes, that is not the case since they are paid four times a year. 

If you don’t pay your taxes in full by the due date, whether or not you owe a refund, you risk being fined. You need to owe less than $1,000 in taxes in order to avoid the penalty. Alternatively, you can pay 90% of the expenses you have for the current tax year or declare that you have paid the entire amount you owe for the previous year, whichever is less.  

Don’t Forget About State Taxes  

When you are calculating your federal once-a-quarter taxes, you must also include the amount you must pay to your state taxing authority. The anticipated dates for state estimated tax payments are the same as those for federal tax. Depending on where you live, you can be penalized for paying too little in taxes or missing the due date for state income taxes.  

If any of the following situations apply in 2022, you will typically be required to make quarterly tax estimated payments to the IRS or Internal Revenue Service:  

After subtracting federal tax hold back and paying back credits, you anticipate owing about $1,000 in federal taxes for 2022. Additionally, you anticipate that federal hold back and paying back credits will be less than the lesser of the following two amounts: 90% tax for 2022 or 100% tax for 2021 (applicable only if your 2021 tax return included 12 months; otherwise, refer to the 90% tax rule only).  

You must figure out your AGI, or adjusted gross income, taxes, taxable income, credits, and deductions for 2022 in order to determine your federal quarterly estimated tax payments. Your federal expected tax payments may be calculated using the expected Tax Worksheet included on Form 1040-ES or consult a tax expert

Final Statements  

Therefore, if you work for a firm that deducts payroll taxes and don’t have any other major sources of income, you probably won’t need to worry about projected payments in 2022. However, if you are self-employed or have additional principal sources of income, you will need to assess your payments and make them every three months.

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