Many taxpayers make quarterly estimated tax payments during the year to stay current on their taxes, but many who should don't. They overlook this step. The Internal Revenue Service urged those who paid too little tax in 2022 to make a fourth quarter payment on or before Jan. 17 to avoid an unexpected potential tax bill or penalty when they file in 2023. Taxes are normally paid throughout the year by withholding tax from paychecks or by making quarterly estimated tax payments to the IRS or by a combination of both. Individuals do this because income taxes are pay-as-you-go, meaning taxpayers need to pay most of their tax during the year as income is earned or received. Who needs to make a payment? Taxpayers who earn or receive income that is not subject to tax withholding such as self-employed people or independent contractors should pay their taxes quarterly to the IRS. In addition, people who owed tax when they filed their current year tax return often find themselves in the same situation again when they file the next year. Taxpayers in this situation normally include: * Those who itemized in the past but are now taking the standard deduction, * Two wage-earner households, * Employees with non-wage sources of income such as dividends, * Those with complex tax situations and/or * Those who failed to increase their tax withholding. What’s taxable? The IRS reminds people that most income is taxable. This includes unemployment income, refund interest and income from the gig economy and digital assets. When estimating quarterly tax payments, taxpayers should include all forms of earned income, including from part-time work, side jobs or the sale of goods. Also, various financial transactions, especially late in the year, can often have an unexpected tax impact. Examples include year-end and holiday bonuses, stock dividends, capital gain distributions from mutual funds, and stocks, bonds, virtual currency, real estate or other property sold at a profit. Delay in requirement for Forms 1099-K On Dec. 23, 2022, the IRS announced that calendar year 2022 will be treated as a transition year for the reduced reporting threshold of $600. For calendar year 2022, third-party settlement organizations who issue Forms 1099-K are only required to report transactions where gross payments exceed $20,000 and there are more than 200 transactions. Last week, the IRS also issued Frequently Asked Questions to help people who may receive Forms 1099-K. Reporting doesn't impact a taxpayer's responsibility to accurately report all income, whether or not they receive a Form 1099-K or other information return (such as Form 1099-MISC, Miscellaneous Information; Form 1099-NEC, Nonemployee Compensation; etc.). How to make an estimated tax payment The fastest and easiest way to make an estimated tax payment is to do so electronically using IRS Direct Pay. Taxpayers can schedule a payment in advance of the January deadline. Taxpayers can now also make a payment through their IRS Online Account. There they can see their payment history, any pending or recent payments and other useful tax information. The Electronic Filing Tax Payment System, or EFTPS, is an excellent choice as well. The IRS does not charge a fee for these services. Plus, using these or other electronic payment options ensures that a payment gets credited promptly. More information on other payment options is available at IRS.gov/payments. Act now to avoid a penalty Either payment method – withholding or estimated tax payments – or a combination of the two, can help avoid a surprise tax bill at tax time and the accompanying penalty that often applies. If a taxpayer failed to make required quarterly estimated tax payments earlier in the year, making a payment soon to cover these missed payments will usually lessen and may even eliminate any possible penalty. Stay current using the Withholding Estimator The Tax Withholding Estimator, available on IRS.gov, can often help people determine if they need to make an estimated tax payment. It also helps people calculate the correct amount of tax to withhold throughout the year based on their complete set of tax facts and circumstances. Alternatively, taxpayers can use the worksheet included with estimated tax form 1040-ES, or read through Publication 505, Tax Withholding and Estimated Tax, available on IRS.gov. Both are excellent resources. Planning ahead It’s never too early to get ready for the tax-filing season. For more tips and resources, check out the Get Ready page on IRS.gov. |