This week is the last chance to bypass a tax penalty if you’re earning money and the IRS still hasn’t received its share, according to the agency.
While some employees pay taxes through withholdings, everyone else must make a second-quarter estimated payment by June 15 — and you’re on the hook with income from self-employment, small businesses, gig economy work, investments and more.
You may also make quarterly payments if you haven’t been withholding enough from your paychecks and want to avoid a tax bill next April.
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“Everyone needs to pay taxes,” said certified financial planner Bryan Hasling, partner at Lodestar Private Asset Management in Alamo, California. “And the IRS strongly prefers that you pay them steadily across the year as opposed to waiting until the last minute.”
The fastest way to make a quarterly estimated tax payment is through IRS DirectPay or sending money through your IRS online account. However, there are other available options listed at the IRS online payments webpage.
The late-payment penalty is 0.5% of your balance due, for each month after the due date, up to 25%.
If your employer withholds money from each paycheck, you can skip estimated tax payments. But you can use the withholding estimator tool to make sure your employer is taking enough.
You can avoid penalties by covering 90% of your 2022 taxes or paying 100% of your 2021 bill if your adjusted gross income is $150,000 or less. (You’ll need 110% of your 2021 bill if you earn more than $150,000.)
If you expect to have a similar income to last year, you can check your 2021 return for last year’s tax liability and divide that number into four quarterly payments.
Other scenarios that may require estimated tax payments could be selling a property, cashing out investments — including cryptocurrency — or taking money from inherited retirement accounts, said Olga Espiritu, a CFP and president of Tree Of Life Wealth Advisory Group in Cooper City, Florida.
“Those are things that people don’t usually deal with every year, and they might come as a surprise,” she said.
However, there may be some scenarios where filers purposely skip estimated payments, despite the late fee, because they don’t have the cash or prefer not to drain their savings, Hasling from Lodestar Private Asset Management said.
“Independent contractors often get paid at the end of large projects,” he said. “And those timelines might not line up with quarterly schedules from the IRS.”
Whether to make estimated tax payments may be less about the penalty and more about their cash flow, Hasling said.