Some taxpayers may not be aware that they owe the IRS a check on Monday, which could lead to their owing the agency a chunk of change come next April.
More Americans are getting caught up by the issue, which involves quarterly estimated taxes, or payments made to the IRS throughout the year on income that isn’t subject to withholding. People who are paid by an employer typically have their federal, state and payroll taxes withheld directly from their paychecks. But millions of Americans today earn extra money as self-employed workers or through their own businesses, where taxes aren’t deducted.
In those cases, taxpayers are required to send the IRS their estimated tax payments on a quarterly basis, with the next due date falling on June 17. The IRS says that taxpayers who are employed can also sidestep the issue by asking their employer to withhold more money from their paychecks, but of course that depends on workers first being aware that they might owe additional taxes.
“Taxes are pay-as-you-go, to be paid as income is earned, during the year,” the IRS said in a notice earlier this month about the June 17 payment deadline.
In other words, regardless of whether you earn money through a paycheck or a side gig, you’re required to settle up with the IRS on a regular basis throughout the year, either via paycheck withholding or quarterly estimated taxes. And here’s the thing: Skipping that step can lead to fines and penalties if you wait to until April 15 of the following year to pay up.
The number of Americans who are subject to estimated taxes is rising, with IRS data showing that 14 million individuals sent quarterly payments to the tax agency in 2023. That’s up 16% from 2022, when about 12.1 million people paid the quarterly tax. Driving that increase is the growing number of people who do gig work or who have started their own businesses. A record 64 million Americans earned money through freelance work in 2023, a jump of 4 million from the prior year, according to an analysis from Upwork.
Higher penalties
Failing to pay estimated taxes can result in underpayment penalties, which have grown stiffer in recent years. That’s because the IRS charges interest, based on the federal short-term rate, on the amount that people underpaid — and that finance charge has spiked due to the Federal Reserve’s rate hikes since 2022.
The IRS’ current penalty assesses an 8% interest charge for underpayments, compared with 3% in 2021, when the Fed’s benchmark rate was close to zero. In 2023, the average penalty for underpayment jumped to $500 per person, up from about $150 in 2022, IRS data shows.
Who owes quarterly payments?
Generally, freelancers, gig workers and people who own small businesses via sole proprietorships, partnerships and S corporations must make quarterly estimated tax payments if they believe they’ll have a tax liability of at least $1,000 when they file.
Others may also be on the hook, though, including investors who sell assets like stocks or bonds throughout the year, according to Fidelity (Taxpayers can use this IRS online tool to determine whether they might owe quarterly taxes.)
Aside from June 17, the additional two payment dates for the current tax year fall on September 16 and Jan. 15, 2025. (The first quarterly estimated tax deadline for 2024 was on April 15.) Taxpayers can make payments online from their checking or savings account via an online account for individuals or IRS Direct Pay, or can use IRS.gov/payments or the IRS2Go app for credit or debit card payments.
Source Agencies
