With the rise of the “gig” economy and entrepreneurship, more people than ever are working outside of the traditional employer/employee system. If you receive some or all of your income via self-employment or contract work, it’s important to have a passing understanding of the U.S. pay-as-you-go tax system. This way, you can make the proper estimated quarterly tax payments throughout the year.
What Does Pay-As-You-Go Mean?
Everyone is on a pay-as-you-go tax system. You can also think of it as a “pay-as-you-earn” system. As you make money, you have to pay taxes on it rather than waiting until the end of the year and paying them all at once.
If you are employed by someone else, your employer is responsible for withholding the appropriate taxes and paying them to the government on your behalf throughout the year. If you are a contract employee or self-employed, though, you don’t have an employer doing that for you. Therefore, you have to withhold your own estimated taxes and pay them to the IRS each quarter.
Estimated Quarterly Payments
It’s important to stay on top of these estimated quarterly payments. Otherwise, the IRS will assess late fees and penalties if you pay late or underpay.
If your current year income is similar to your previous year income, you can pre-plan your payments based on that amount. If your income is unknown ahead of time, it’s best to keep track of what comes in and make your tax payments based on the actual amount.
A tax professional can help ensure that you’re meeting all of your tax obligations throughout the year. Whether you’re a contract or self-employed worker, a tax pro can assist with making proactive financial decisions so that you stay in good standing with the IRS all year long.
So, if you work for yourself and are looking for tax preparation and planning assistance in Arlington, call the team at Taxation Solutions, Inc. We are here to help!