WASHINGTON – With the last third of the year now in full view, the IRS today reminded small business and self-employed taxpayers of the importance of meeting their tax obligations. Part of those obligations normally include making quarterly estimated tax payments.
This news release is part of an ongoing campaign aimed at helping small businesses understand tax reform changes that affect their bottom line.
Who may need to pay estimated taxes
Individuals, including sole proprietors, partners and S corporation shareholders, may need to pay quarterly installments of estimated tax unless they owe less than $1,000 when they file their tax return or they had no tax liability in the prior year (subject to certain conditions).
Other taxpayers who may need to make estimated payments include someone who:
- has more than one job but doesn’t have each employer withhold taxes.
- is self-employed.
- is an independent contractor.
- is a representative of a direct-sales or in-home-sales company.
- participates in sharing economy activities where they are not working as employees.
Taxes are pay-as-you-go
Because the U.S. tax system operates on a pay-as-you-go basis, taxpayers are required, by law, to pay most of their tax liability during the year. For 2018, this means that an estimated tax penalty will normally apply to any party that pays too little tax– generally less than 90 percent of the tax shown on the return for the current tax year or 100 percent of the tax shown on the return for the preceding tax year — during the year through withholding, estimated tax payments or a combination of the two.
In recent years, the IRS has seen an uptick in people subject to estimated tax penalties. These penalties normally apply when someone underpays their taxes. The number of people who paid this penalty jumped from 7.2 million in 2010 to 10 million in 2015, an increase of nearly 40 percent. The penalty amount varies, but can be several hundred dollars.