A lot of times when one thinks of owing the IRS money for the year, the only thought is of this happening on April 15 (you know, in regular years anyway). However, the agency may be expecting money up to four times a year, and there can be penalties if they are not getting it as they wish.
First, I don’t want to use scare tactics here. If you get a majority of your income as a regular employee in a job where you receive a W2 at the end of the year, then you likely are having enough taxes withheld from your paycheck that there is no need for extra payments. So, if that’s the case and your situation hasn’t significantly changed since last year, then you need not pay attention to this.
Beyond that, though, the situation of many people HAS changed this year. A great number are making money in new ways, and some of those are doing so as contractors, which means taxes are not automatically being withheld from that income. The IRS does not always like when that’s the situation.
Overall, if you expect to owe $1,000 or more when you file your taxes for the year, the IRS expects some of that as the year goes on. Again, if enough is being withheld from your paycheck, there are no worries. It also doesn’t take all that much income from other places to reach this mark, though. Unfortunately, there is no easy and quick answer as to what puts you in this situation. Taxes are complicated, so there are no absolutes like ‘If you made X amount of dollars as a contractor and paid no taxes, you will owe Y amount of dollars in taxes.” These answers are dependent on individual situations.
If you then want to get a handle on your individual situation, you can find some information and links here from a recent IRS release about making estimated tax payments. And if you need more than that, as always you can set up an appointment with us and we can make plans to help mitigate whatever tax situation you are in.
It is not only contractors who may end up with surprising numbers come tax time, as many are also receiving unemployment compensation for the first time. It may hurt to think that these funds, which are being received to help one through a difficult time, will be taxed. It may hurt even more, though, if one doesn’t realize that withholding taxes from those funds when they are received is voluntary and must be opted into. The IRS has another release about that situation here.
These aren’t going to be the only two new situations that people find themselves in this year. So, in this time where everyone is battling more difficulties than they deserve, it can pay to try to get a grasp on the tax implications of all that newness before receiving another unpleasant surprise next year.
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To ensure we don't make the folks at the IRS ornery, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.