Upcoming Due Date: Estimated Taxes are Due June 15th

Want to avoid tax season surprises? 

Master your estimated taxes!

The next estimated tax deadline is fast approaching on June 15th, so let’s make sure you have all the basics covered so you’re on top of your taxes. 

What are Estimated Taxes?

Estimated taxes are quarterly payments made to the IRS throughout the year on income that isn’t subject to withholding. Taxes are automatically deducted from paychecks for W-2 employees. But freelancers, self-employed people, and those with a significant side hustle need to manage their tax burden differently. 

Think of estimated taxes like pre-paying your annual tax bill.

Let’s say you’re a freelance writer and you expect to earn a total of $40,000 this year. Under the normal tax system, you wouldn’t pay any taxes until you file your tax return next April. 

However, with estimated taxes, you’re essentially splitting your tax burden into four equal payments (or adjusting based on your income flow) throughout the year. With the upcoming June 15th deadline, this would be your second estimated tax payment for the year.

Estimated taxes are part of a stronger tax strategy. 

Who needs to pay estimated taxes? 

Here’s who typically needs to pay estimated taxes:

• Business owners: Sole proprietors, partners, and S corporation shareholders generally need to pay estimated taxes on their business income.
• Freelancers and independent contractors: If your income is inconsistent or you don’t have taxes withheld at the source, you’ll likely need to pay estimated taxes.
• Side hustlers: If you have an extra income in addition to your main job, you may want to consider estimated taxes.
• Investors: If you earn significant income from dividends, interest, or capital gains, you may need to make estimated tax payments.

How much side income is enough to trigger estimated taxes? 

The IRS doesn’t have a specific income threshold for side hustles, but they do have a general rule: If you expect to owe more than $1,000 in taxes after withholding (the taxes already taken out of your paycheck, if any), you should pay estimated taxes. It’s better to be proactive and err on the side of caution to avoid penalties. 

Benefits of Paying Estimated Taxes on Time

There are several key benefits to ensuring you pay your estimated taxes on time:

• Avoid Penalties and Interest: The biggest advantage of timely estimated tax payments is steering clear of IRS penalties and interest charges. If you underpay your estimated taxes throughout the year, you may be hit with a penalty based on the amount of the underpayment. Beware – these penalties can accrue interest as well!

• Peace of Mind: Knowing your tax obligations are met throughout the year gives you peace of mind and avoids the potential scramble come April. Spreading out your tax payments and aligning with your annual plan makes tax season a breeze.

• Improves Cash Flow Management: Estimated taxes encourage you to be mindful of your tax liability throughout the year. This allows for better cash flow management as you set aside funds specifically for taxes, preventing large tax payments at year-end.

• Reduces Risk of Audit: While a consistent history of timely estimated tax payments doesn’t guarantee you won’t be audited, it can certainly lower your risk. The IRS often prioritizes audits for taxpayers with a history of late or underpaid estimated taxes.

How to Estimate Your Taxes

While estimated taxes might seem complex, the basic steps to estimate your tax burden are manageable. Here’s a breakdown to get you started with a simple example. 

Important Note: This is a simplified example and doesn’t account for factors like self-employment tax or specific tax rates. However, it illustrates the basic idea of estimating your taxable income.

1. Gather Your Income Information: Let’s say you’re a freelance web developer and you expect to earn $30,000 from freelance gigs this year.
2. Estimate Your Deductions and Credits: You also plan to deduct some of your home office expenses, which you estimate will total $2,000.
3. Calculate Your Taxable Income: Now subtract your deductions from your income: $30,000 (income) – $2,000 (deductions) = $28,000 (taxable income). This is the amount the IRS will use to calculate your tax owed.
4. Use a Tax Calculator or Software: The IRS website offers a free tax calculator tool to help estimate your taxes based on your $28,000 taxable income, although the calculator isn’t typically aimed at freelancers. Consider independent software providers which may be able to give you an estimate.
5. Consider Consulting a Tax Professional: For a more personalized approach, consider seeking guidance from a tax professional. They can help navigate the complexities of your specific tax situation, especially if you have multiple income sources, significant deductions, or a complex tax situation.

Take Control of Your Estimated Taxes with Momentum Tax

The upcoming June 15th deadline serves as a reminder to ensure you’re on track with your estimated taxes. While the process may seem daunting, remember, you don’t have to do it alone.

Here’s how Momentum Tax can help:

• Estimated Tax Planning & Preparation: Their tax planning and preparation services go beyond just filing your return. They can help you estimate your tax liability throughout the year, ensuring timely and accurate estimated tax payments.
• Peace of Mind: Momentum Tax takes the guesswork out of estimated taxes, freeing you to focus on running your business or managing your finances.
• Tax Savings Potential: Our expertise can help you identify potential deductions and tax credits you may qualify for, potentially reducing your tax liability.

Don’t let estimated taxes add stress to your life.

Contact Momentum Tax today for a free consultation. Discuss your specific situation and see how we can help you navigate estimated taxes and achieve your financial goals.