Who is Typically Exempt from Tax Withholding?
With a substantial rise in self-employed people over the last decade or more, it may be no surprise that several more people are subject to most or all of their income is exempt from tax withholding. They may be surprised or stressed at tax time if this is new for them and they haven’t experienced this way of paying taxes before.
If you have a “standard” job or career, most or all of your income is subject to withholding, and this isn’t something that should worry you, provided your tax documents have been filled out accurately. Hence, the IRS withholds the appropriate amount for you and your family.
For those who are self-employed or freelancers, taxes are computed and paid differently. This article will review ways to be proactive in determining and paying your taxes promptly to avoid penalties and headaches.
When Should I Check My Withholding for Accuracy or Changes?
As mentioned, if you are new to the freelancing or self-employed world, it may be best to consult a tax professional. If you are not new but have experienced significant changes in your life, it may be a great time to double-check your withholdings to avoid any surprises at the end of the year.
Other great times to check your withholding are if tax laws that affect you have changed. Tax laws are subject to changes, and all information is readily available so you can check to see if the changes apply to you. If you are in doubt, contact a tax professional or tax attorney.
Suppose you have other changes in your life that may affect taxes. For example, getting married, divorced, or separated will likely all have tax implications. Adopting or birthing a child, purchasing a home, filing for bankruptcy, retiring from your career, and more are also good times to check in to make sure your withholdings are in line with what you can expect to owe or be refunded at the end of the tax year.
Other Life Changes that May Affect Withholding
Several other significant changes in our lives may directly affect our withholdings.
Perhaps you spent most of your life working in an office for a boss and had your taxes withheld following standard practice, and now you are a freelancer working remotely.
Or maybe you have finalized your divorce and now have alimony or child support that may be subject to tax, and you need to learn how to handle your withholdings.
These are just a few examples of life circumstances that may cause your tax preparation to shift, and the above criteria do not reflect an exhaustive list.
What is an Estimated Tax?
If most or all of your income is exempt from withholding, you may be required to pay estimated taxes throughout the year quarterly. Taxes are meant to be paid in the same year the income associated with those taxes was obtained. This results in the need for estimated taxes to be paid quarterly or annually.
If you expect to pay more than $1,000 in taxes by the end of the year, it is a good idea to look into estimated taxes and how you can account for them to avoid penalties.
To calculate, it is important to seek professional tax guidance. You will be asked to provide your income, deductions, and credits from the prior year and all income from the current year and deductions to determine your adjusted gross income. Your estimated taxes will be loosely calculated based on this equation.
When Do I Have to Pay Estimated Taxes?
Estimated tax payments are divided into four payment periods by the IRS.
- Taxes from January 1st-March 31st are due on April 15th
- Taxes from April 1st-May 31st are due on June 15th
- Taxes from June 1st-August 31st are due on September 15th
- Taxes from September 1st through the end of the year are due on January 15th of the following year
If these dates fall on a weekend day or a legal holiday, the payments are due the next day. Paying online is likely the most efficient way to ensure you aren’t missing deadlines. Consult a tax professional or experienced tax attorney to ensure you aren’t inadvertently subjecting yourself to penalties for late payments.
Why Work with a Tax Attorney?
If you have never faced an issue with the IRS, you may not be aware of the level of fear and anxiety that trouble with them can induce. The IRS is one of the most powerful forces to be reckoned with, and they can impose harsh penalties and fines if their specific instructions aren’t followed.
Don’t go into a tax issue blindly. Work with an experienced and compassionate tax attorney with several years of helping clients answer issues they have faced with the IRS and prepare to avoid further problems in years to come.
I have spent years working with clients who have faced relatively minimal penalties and those with significant, life-changing penalties imposed by the IRS. I take pride in my work and in defending my clients against one of the largest collection agencies in the world, and I look forward to helping you, too.
Contact my office at (786) 522-0410 to get started. I look forward to being your tireless tax advocate.