Who Needs to Pay Estimated Taxes?
Bedford, NH Resident Has Questions
Anyone who owns a business or works as a freelancer, earning non-wage income, is required to make estimated tax payments. This self-employed income has no automatic tax withholdings. Salaried employees who have completed a W2, have taxes withheld directly from their paycheck. However, if you are not a W2 employee these deductions will not be made and you will instead need to pay estimated taxes.
A Bedford resident had just started a new venture doing some freelance work. Unsure of how the tax situation would be handled, he contacted the experts at Merrimack Tax Associates.
Self-Employed Individuals Required to Pay Estimated Taxes
Anyone who is self-employed or even W2 employees that are doing freelance work on the side must pay estimated taxes each quarter. This earned income is not taxed by the IRS, so this payment needs to be made each quarter. It can be difficult to calculate the estimated taxes but you need to be sure an adequate amount is sent in for each payment. If self-employed individuals pay too little or fail to make these quarterly payments, they can be fined by the IRS.
Investment and Retirement Income May Require Estimated Tax Payments
Other income sources may also require taxpayers to make quarterly estimated payments. This income may come from substantial investments, significant retirement income or a large windfall. Alimony also falls into this category, considered income to take into consideration when paying estimated taxes.
Neglecting to pay your estimated taxes can come with large penalties from the IRS, including interest and fines. If you are unsure of how much to pay in estimated taxes, it can be helpful to speak to your tax professional about this.
With the guidance of Merrimack Tax Associates, the Bedford resident now has a better understanding of how to handle his taxes as self-employed freelancer.