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How to Withhold Your Own Taxes

Updated for Tax Year 2016


OVERVIEW

If you have no employer to withhold federal taxes, then you're responsible for withholding your own.


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.

Step 1: Determine if estimated tax payments are necessary

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.

Step 2: Calculate the minimum estimated tax payment to make

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.

Step 3: Make your payments on time

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 2016 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.

Step 4: Avoid late-payment penalties

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.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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