The Internal Revenue Service (IRS) has announced to taxpayers who pay estimated taxes that the deadline to submit their third quarter payment is September 15, 2022.
Estimated taxes generally apply to any type of taxable income that may not normally have taxes withheld from their paycheck by their employers. This includes earned income, dividend income, rental income, interest income, and capital gains.
What You Need to Know About Estimated Tax
The U.S. tax system operates on a pay-as-you-go basis where taxpayers are required to pay most of their tax during the year, as they earn or receive income. Therefore, individuals not subject to withholding may need to make quarterly estimated tax payments.
According to the IRS, taxpayers are required to make a payment each quarter. The first installment was on April 15, 2022; the second is on June 15, 2022; the third is on September 15, 2022; and the final is on January 12, 2023.
Estimated tax is a quarterly tax installment payment for the year based on your reported income for the period. Estimated taxes apply mostly to small business owners, freelancers, and independent contractors who do not have their taxes automatically withheld from their paychecks, as regular employees do.
More specifically, taxpayers are subject to estimated tax payments if they expect to owe at least $1,000 in taxes for 2022 after subtracting their withholding and tax credits.
Their withholding and tax credits are to be less than the smaller of 90% of the tax to be shown on their 2022 tax return or 100% of the tax shown on their 2021 tax return. Their 2021 tax return must cover all 12 months.
However special rules may apply to some groups of taxpayers, such as farmers, fishermen, casualties, and disaster victims. This may extend to those who recently became disabled, recent retirees, and those who receive income unevenly during the year.
Figuring Out Your Estimated Tax
You can use Form 1040-ES to figure out your estimated tax. You can then pay your taxes by mailing a check or pay through a money order that is made payable to the United States Treasury.
However, a faster and easier option is available through Electronic Federal Tax Payment System (EFTPS). They can do this by securely logging into their IRS Online Account or using IRS Direct Pay to submit a payment from their checking or savings account. They also have the option to pay using a debit, credit card or digital wallet. However, when paying taxes with debit or debit cards additional charges will be applied by the payment processor.
If you receive income unevenly throughout the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method.
You can also avoid paying estimated taxes in one of two ways. The first is having a working spouse who agrees to increase his/her wage withholding to cover your obligation provided you file a joint return. The second is opting for an S corporation status if you’re a limited liability company (LLC) where you get to take a salary from the business from which withholding can be made.
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