How to Handle Estimated Tax Payments When You Have Irregular Income
If you work for yourself or as a freelancer, you could notice that your revenue varies from month to month or even from year to year. Due to this, figuring out how much estimated tax payments you should make and when to make them might be difficult, but there are tax deduction apps that can help with this. In this post, we’ll look at a few methods for managing projected tax payments when your revenue is erratic.
Estimated tax payments: what are they?
Let’s first go through the definition of projected tax payments. Payments made throughout the course of the year to meet your tax burden are known as estimated tax payments. You must pay both income tax and self-employment tax (which includes Social Security and Medicare) on your earnings if you are a self-employed person.
You must submit anticipated tax payments to the IRS if you anticipate owing $1,000 or more in taxes for the year. However, depending on your circumstances, the precise due dates may change. The payments are normally made every three months.
Why is managing projected tax payments challenging when income is irregular?
It can be difficult to forecast your annual tax liability if your income is erratic. For instance, you might not owe as much in taxes in a slow month as you would in a busy one. This can make figuring out how much you need to pay in anticipated taxes each quarter difficult.
Additionally, if your income suddenly increases significantly, you can owe more in taxes than you anticipated. If you don’t have enough money set aside to handle the higher tax liability, this could be particularly difficult. All of this can have an impact on your IRS tax return.
How to manage projected tax payments when your income is irregular
Despite the difficulties, there are a number of methods you can employ to manage estimated tax payments when your income fluctuates. Here are some to think about:
- Apply the annualized income approach
The annualized income technique bases your predicted tax payments on your actual quarterly income and outgoings. You can amend your projected tax payments using this method to account for any changes in your income.
You must finish Form 2210, Schedule AI, in order to employ the annualized income technique. On the basis of your actual income and expenses for each quarter, this form will assist you in calculating your estimated tax payments.
- Pay more throughout the months when you earn more money
Making greater anticipated tax payments during the months when your income is higher is another tactic. By doing this, you can lessen the possibility that you will underpay your taxes during certain months and incur penalties and interest fees.
You can either reduce or forgo your projected tax payment if your month is slow. However, bear in mind that a bigger payment might be required in the next quarter as a result.
- Implement tax planning software
You can track your projected tax payments and make adjustments as necessary throughout the year with the aid of tax planning software. Based on your income and expenses, these tools can help you determine your tax liability and recommend how much you should be paying in anticipated taxes each quarter.
For freelancers and other self-employed people, several well-liked tax preparation software solutions include QuickBooks Self-Employed, FreshBooks, and TurboTax Self-Employed.
- Work with a tax expert
Consider collaborating with a tax expert if you find it too difficult to manage approximated tax payments on your own. A small business tax advisor may assist you in calculating your tax due, modifying your projected tax payments as necessary, and offering advice on how to lower your tax burden.
If you have erratic income or lack confidence in your capacity to calculate your tax liability on your own, working with a tax professional may be extremely beneficial.
In conclusion, managing projected tax payments when you have erratic income can be difficult, but it is feasible to keep on top of your tax responsibilities with some forethought and changes. Consider applying the safe harbor rule, estimate your income for the year, make necessary modifications, maintain account of your income and expenses, and seek assistance from a tax professional if necessary, especially if you pay taxes on investment income.
