Some workers are not employees but instead are contractorswhen working with a business. A contractor is different than an employee who receives regular W-2 wages. Instead of having taxes deducted from each paycheck, a contractor receives compensation that is reported to the IRS on a 1099 form. This form of compensation requires the individual to be responsible for taking out taxes on their own. With this in mind, it is extremely important for the individual to become aware about how much they will owe when it is time to pay taxes. Many contract employees should assess whether it is necessary to pay quarterly estimated taxes and avoid an underpayment penalty at the end of the year. To assess whether you need to pay estimated taxes you need to ask yourself the following questions:
- When I started working for this Company did I fill out a W-4 (Employee Withholdings Form) or a W-9 (Request for Taxpayer ID Number)? If it was a W-9 you could be a candidate for estimated taxes
- Do I expect to have $1,000 or more of tax liability throughout the year? If yes, then you should submit estimated tax payments.
To help you calculate what your estimates should be the IRS has a worksheet that will walk you through the calculation. It can be found here: http://www.irs.gov/pub/irs-pdf/f1040es.pdf
Quarterly estimate payments are required if a person expects to have more than $1,000 of tax owed in the year. The schedule for quarterly payments is this:
- For income received Jan. 1 through March 31, estimated tax is due April 15.
- For income received April 1 through May 31, estimated tax is due June 15.
- For income received June 1 through Aug. 31, estimated tax is due Sept. 15.
- And for income received Sept. 1 through Dec. 31, estimated tax is due Jan. 15.
These quarterly dates can sneak up very quickly. Planning ahead and marking down the due dates will make each payment a bit easier. Also make sure you set aside a portion of each payment received from your employer so that you will have the funds available to make your quarterly estimate. Taking the appropriate steps to plan and think ahead will only help the process run smoother.
What are the consequences if one makes a late quarterly payment? A payment not postmarked on or before the due date will be considered late and you will be penalized. In addition, the IRS has the ability to charge interest on the money owed each day the payment is late. If this happens, the amount owed can increase dramatically. And don’t forget about your state, and if applicable, local taxes too! These generally follow the same guidelines, but the amounts and calculations may vary.
So what’s our advice? Staying organized, being motivated, planning ahead and paying what you owe are just a few pieces of advice to managing quarterly tax payments.
Or, you can always contact O|Miga to help carve your path to financial success!