If you are a business owner or independent contractor, you are probably always looking for ways to reduce your tax burden. The end of the year is a time for your last efforts in seeking tax deductions and making preparations for next year. Included in next year’s plan might be quarterly goals for your business. Is taking care of your tax burden part of these plans?
The Internal Revenue Service recently released a guide to withholding estimated taxes in an effort to help people avoid penalties. The number of Americans facing a penalty for failing to withhold taxes has spiked lately. 40 percent more taxpayers paid the penalty in 2015 than in 2010, according to the agency.
The IRS estimates the average person pays several hundred dollars in penalties for failing to withhold taxes. Therefore, if you are self-employed or own your own business, you could see a potential saving in money and hassle at tax time if you make a plan to withhold.
How do I withhold taxes?
1. Make an estimate
The IRS recommends estimating your withholdings based on your tax burden the year prior. They even provide a calculator tool for doing so. If life has changed in a big way for you recently, such as getting married, having a child or starting a second job, you should speak with a tax professional on how this change could affect your taxes.
2. Pay quarterly
The IRS outlines four dates per year to make your withholding payments. These payments can be made using a Form 1040-ES, the IRS website or a new IRS mobile app. Quarterly dates to make payments are as follows:
- April 15
- June 15
- September 15
- January 15
3. If you make more, pay more
The IRS recommends that if you make more than $150,000 in gross income, you should withhold 110 percent of your estimated tax burden. This strategy can help account for changes in the law as the year progresses.
Take action to reduce your tax penalties
Remember, you take every legal avenue to reduce your liability for tax burdens and penalties. Estimating your tax burden, withholding a portion of your income and making quarterly payments to the IRS is one way you might help avoid penalties at tax time.