How to Withhold Your Own Taxes
Whether you work for an employer or are self-employed, you must make estimated tax payments during the year when your income exceeds certain levels. As an employee, you pay these estimated payments by having your employer withhold amounts from your paycheck. In that case, your employer pays the IRS for you. However, if you have no employer to withhold federal taxes, then you will need to do this by making estimated tax payments.
If the amount of tax you owe after reducing your total tax bill by the total amount withheld from your paycheck and refundable credits you anticipate claiming is less than $1,000; then you aren’t responsible for making estimated tax payments.
If this amount is $1,000 or more, the IRS requires you to make estimated payments when it’s less than the smaller of 90 percent of the tax you will owe at the end of the year when you prepare your return or 100 percent of the tax you owe on last year’s return. If you fail to make these payments, the IRS will charge you late-payment penalties.
If you determine that you need to make estimated tax payments, then you should obtain Form 1040-ES to calculate the amount of each payment. If you use tax preparation software, such as TurboTax, it will generate the form based on the information you provide. Essentially, the form calculates your payments using an estimate of your taxable income for the year.
Estimating your taxable income requires you to reduce your gross income by all exemptions and deductions you anticipate claiming, and to reduce the amount of tax you will owe by the tax credits you are eligible for.
The IRS imposes four payment deadlines throughout the year. If you earn all of your income through self-employment, it’s more likely you will have to make four payments than an employee who has insufficient withholding. As a general rule, you don’t have to make your first estimated tax payment until you earn sufficient income that is taxable.
In 2011 for example, the first payment deadline covers income you earn between Jan. 1 and March 31. If you are employed during this period and have sufficient amounts withheld from your paycheck, you need not make an estimated payment for this period. However, if you start earning income as an independent contractor during the second period of April 1 through May 31, then your first payment may be due by the second deadline.
When you fail to make estimated tax payments on time or underpay your tax, then the IRS penalizes you by imposing interest charges on your underpayment. For example, if you are required to make a $1,000 payment on April 15 but you only send the IRS $600, interest will accrue on your $400 underpayment each month until it is paid.
