As the third quarter of 2023 draws to a close, September 15 is crucial for freelancers, self-employed individuals, small business owners, investors, and others.
This date marks the due date for quarterly tax payments to the Internal Revenue Service (IRS). Here’s what you need to know to avoid penalties and stay on top of your tax obligations.
Estimating Taxes and Avoiding Penalties
Who Is Required to Pay Estimated Taxes?
Individuals are typically required to make quarterly Those who expect to owe $1,000 or more in annual taxes must make estimated tax payments.
Many employees have taxes withheld from their paychecks, but those with income from self-employment, small businesses, investments, or work in the contract economy are responsible for making these payments themselves.
To avoid underpayment penalties, it is essential to calculate and pay your taxes accurately and on time.
The Internal Revenue Service offers a ‘safe harbor’ rule to help taxpayers avoid penalties.
If your adjusted gross income is less than $150,000, you can satisfy this condition by paying either 90% of your estimated taxes for 2023 or 100% of your tax liability from the prior year.
The safe harbor rule requires higher-income individuals whose adjusted gross income was $150,000 or more in 2022 to pay the lesser of 90% of their estimated taxes for the current year or 110% of their estimated taxes from the prior year.
Read more: IRS Targets 1,600 Millionaires In Aggressive Tax Collection Effort
Mastering Tax Payment Strategies to Avoid Penalties
The American tax system is based on a ‘pay-as-you-go’ model.
Failure to pay estimated taxes on time may result in penalties. Suppose you fail any of the four estimated tax payment deadlines for 2023 (April 18, June 15, September 15, or January 16, 2024).
In that case, you may be subject to a late penalty of 0.5% of your unpaid balance per month or partial month, up to a maximum of 25%, plus interest.
Electronic payments are the most convenient and secure method for making estimated tax payments.
The IRS recommends online payment options, such as payments through your online account, Direct Pay, and the Electronic Federal Tax Payment System.
There may be transaction fees associated with debit and credit card payments.
To ensure a seamless tax experience, financial experts advise maintaining accurate records, monitoring your tax situation, and, if necessary, seeking professional guidance.
Complying with the safe harbor requirements and making on-time tax payments are crucial to meeting your tax obligations and averting penalties.
As a reminder, the information in this article is based on available data at the time it was written and may be subject to change as the tax year progresses.
Don’t designate future tax deadlines to comply with IRS regulations on your calendar.
Read more: IRS Unveils Ambitious Plan To Investigate 1,600 Millionaires
