Have you assessed an estimated tax penalty for tax year 2016? You still have time to reduce or eliminate the penalty for 2017 and future years.
To help raise awareness about the growing number of estimated tax penalties, the IRS has launched a new “Pay as You Go, So You Don’t Owe” web page. This IRS.gov page has tips and resources designed to help taxpayers, including those involved in the sharing economy, better understand tax withholding, make estimated tax payments, and avoid an unexpected penalty.
Those in Sharing Economy May Need to Make Estimated Payments
You may make estimated tax payments to pay tax on income that isn’t subject to withholding (such as income from self-employment and rental activities). You may also make estimated tax payments to avoid penalties if the amount of income tax withholding from your salary, pension or other income is not enough to cover your tax for the year.
Taxes are pay-as-you-go, and making estimated tax payments is HOW you pay-as-you-go. Taxpayers use estimated tax payments to pay both income tax and self-employment tax (Social Security and Medicare). If you don’t pay enough tax, through either withholding or estimated tax, or a combination of both, you may have to pay a penalty. The payment of estimated tax for the income for the first quarter of the calendar year (that is, January through March) is due on April 15. Payments for subsequent quarters are due on June 15, September 15 and January 15. If you don’t pay enough by these dates you may be charged a penalty even if you’re due a refund when you file your tax return.
If you also work as an employee, you can often avoid needing to make estimated tax payments by having more tax withheld from your paycheck. This may be a particularly attractive option if, for example, your sharing economy activity is merely a side job or part-time business. To do this, fill out a new Form W-4 and give it to your employer. The Withholding Calculator is a helpful resource.