Some taxpayers might not realize they owe the IRS a payment on Monday, which could result in a significant debt next April.
More Americans are facing this issue, which involves quarterly estimated taxes—payments made to the IRS throughout the year on income not subject to withholding. Those employed by a company usually have federal, state, and payroll taxes automatically deducted from their paychecks. However, millions now earn additional income as self-employed workers or business owners, where taxes aren’t withheld.
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In these cases, taxpayers must send estimated tax payments to the IRS quarterly, with the next due date on June 17. The IRS advises that employees can avoid this by asking their employer to withhold more money from their paychecks. However, this requires workers to be aware that they might owe extra taxes.
“Taxes are pay-as-you-go, to be paid as income is earned, during the year,” the IRS stated in a notice earlier this month about the June 17 deadline.
In short, whether you earn money through a paycheck or a side gig, you’re required to settle with the IRS throughout the year, either through paycheck withholding or quarterly estimated taxes. Skipping this step can lead to fines and penalties if you wait until April 15 of the following year to pay.
The number of Americans paying estimated taxes is increasing. IRS data shows that 14 million individuals sent quarterly payments in 2023, up 16% from 2022 when about 12.1 million paid the quarterly tax. This rise is driven by the growing number of people doing gig work or starting their own businesses. A record 64 million Americans earned money through freelance work in 2023, a jump of 4 million from the previous year, according to an Upwork analysis.
Higher Penalties
Failing to pay estimated taxes can lead to underpayment penalties, which have become stricter recently. The IRS charges interest on underpaid amounts, based on the federal short-term rate, and this charge has increased due to the Federal Reserve’s rate hikes since 2022.
The current IRS penalty applies an 8% interest charge on underpayments, compared to 3% in 2021 when the Fed’s benchmark rate was nearly zero. In 2023, the average underpayment penalty soared to $500 per person, up from about $150 in 2022, according to IRS data.
Who Owes Quarterly Payments?
Freelancers, gig workers, and small business owners with sole proprietorships, partnerships, or S corporations generally need to make quarterly estimated tax payments if they expect a tax liability of at least $1,000 when filing.
Others may also need to pay, including investors who sell assets like stocks or bonds throughout the year, according to Fidelity. Taxpayers can use this IRS online tool to check if they might owe quarterly taxes.
Aside from June 17, the additional two payment dates for the current tax year fall on September 16 and Jan. 15, 2025. (The first quarterly estimated tax deadline for 2024 was on April 15.) Taxpayers can make payments online from their checking or savings account via an online account for individuals or IRS Direct Pay, or can use IRS.gov/payments or the IRS2Go app for credit or debit card payments.
Source: CBS News
