Your income may vary from month to month, or even from year to year, whether you work for yourself or as a freelancer. Due to this, determining how much and when to pay your estimated taxes may be challenging; however, there are tax deduction apps that can assist you with this. In this article, we’ll examine a few strategies for controlling anticipated federal income tax obligations when your income fluctuates.
What are estimated tax payments?
Let’s start by going through what estimated tax payments are. Estimated tax payments are sums of money made over the course of a year to cover your tax liability. If you are self-employed, you must pay both income tax and self-employment tax (which covers Social Security and Medicare) on your earnings.
If you expect to owe $1,000 or more in taxes for the year, you must make projected tax payments to the IRS. However, the exact due dates may alter based on your situation. Typically, payments are issued every three months.
Why is it difficult to manage predicted tax payments when income is irregular?
If your revenue is unpredictable, it may be challenging to predict your annual tax obligation. In a sluggish month, for example, you might not owe as much in taxes as you would in a busy one. This might make calculating the amount of projected taxes you must pay each quarter challenging.
Also, you can owe more in taxes than you anticipated if your income suddenly increases dramatically. Your IRS tax return may be impacted by all of this.
How to handle anticipated tax obligations if your income is inconsistent
Notwithstanding the challenges, there are some strategies you can use to control projected tax payments when your income varies. Here are a few things to consider:
Use the annualized income strategy
With the annualized income method, your projected tax payments are calculated based on your actual quarterly income and expenses. With this technique, you can adjust your predicted tax payments to take any changes in your income into account.
To use the annualized income method, you must complete Form 2210, Schedule AI. This form will help you figure out your expected tax payments based on your real income and expenses for each quarter.
When you have extra money, pay more every month
Another strategy is to increase your projected tax payments in the months when your income is higher. By doing this, you can reduce the likelihood that you’ll underpay your taxes at some points and end up paying fines and interest.
If your month is slow, you can either lower or skip your estimated tax payment. But, keep in mind that as a result, a larger payment can be needed in the next quarter.
Put tax-planning tools to use
With tax planning software, you may monitor your anticipated tax payments and make changes as needed during the year. These tools can assist you in calculating your tax liability and suggest how much you should be setting aside for anticipated taxes each quarter based on your income and expenses.
QuickBooks Self-Employed, FreshBooks, and TurboTax Self-Employed are a few popular tax preparation software options for independent contractors and other self-employed individuals.
Consult a tax professional
If you find it too difficult to manage anticipated tax payments on your own, think about working with a tax professional who can help you determine your tax liability, adjust your projected tax payments as necessary, and offer suggestions on how to reduce your tax burden.
Working with a tax expert may be quite helpful if you have variable income or lack confidence in your abilities to determine your tax liability on your own.
In summary, managing predicted tax payments when you have variable income can be challenging, but it is possible to stay on top of your tax obligations with a little planning and adjustments. Consider using the safe harbor rule, project your income for the year, make appropriate adjustments, keep track of your income and expenses, and, if you have to pay taxes on investment income, seek help from a tax expert.
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