Tuesday Tax Tip - Income Taxes-Pay-As-You-Go
Income taxes are pay-as-you-go. This means that by law, taxpayers are required to pay most of their taxes during the year as income is received.
There are two ways to do this:
Withholding from paychecks, pension payments, Social Security benefits or certain other government payments including unemployment compensation in some cases. This is how most people pay most of their tax.
Making quarterly estimated tax payments throughout the year to the IRS. Self-employed people and investors, among others, often pay tax this way.
Either method can help avoid a surprise tax bill at tax time and the accompanying penalties that often apply. If a taxpayer failed to make required quarterly estimated tax payments earlier in the year, making a payment to cover these missed payments, as soon as possible, will usually lessen and may even eliminate any possible penalty.
The IRS recommends that everyone check their possible tax liability by using the IRS Tax Withholding Estimator. This online tool allows taxpayers to see if they are withholding the right amount and find out if they need to make an estimated tax payment. Form 1040-ES, available on IRS.gov, includes a worksheet for figuring the right amount to pay as well.
This is especially important for anyone who owed taxes when they filed their 2021 return. Taxpayers in this situation may include those who itemized in the past, two wage-earner households, employees with non-wage sources of income and those with complex tax situations.
Taxpayers who owed taxes when they last filed and who did not adjust their 2021 withholding may find that they owe taxes again, and even a penalty, when they file their 2022 return next year. Making a quarterly estimated tax payment now can help.
