If you’re one of the millions of people in the U.S. who sends quarterly estimated income taxes to the IRS, you already know that doing it right requires dedication and organization.
In contrast to an employer automatically deducting taxes from your paycheck, the process of sending the money to the agency and in the correct amount is your responsibility.
So, what should you do if you didn’t send the IRS any money this past year? Stay calm and take swift action. In most cases, there will be consequences, but there are also remedies. Here’s what to know and do.
Who Needs to Pay Quarterly Taxes
Self-employed people such as independent contractors, freelancers, sole proprietors and business partners are almost always required to make estimated tax payments on their income.
If you’re among them, the IRS expects you to pay what you owe every three months, since the U.S. has a pay-as-you-go tax system.
The dates to get your quarterly estimated taxes paid are April 15, June 15 and Sept. 15, then Jan. 15 of the following year.
If you didn’t make any of those deadlines, you may be experiencing a lot of anxiety right now. Individuals and businesses that paid you more than $600 during the tax year should have sent you 1099 forms. If box 4 on the form shows that no taxes were withheld, you probably owe the IRS money.
[What Is a 1099 Form and What Should You Do With It?]
There are some exceptions to quarterly payments, though.
“You’re exempt if you expect to owe less than $1,000 in taxes,” says Stephen Weisberg, lead tax attorney at W Tax Group in Detroit.
According to the IRS, if your net earnings from self-employment are $400 or more, you must file a tax return, but you can pay taxes at the end of the year without any penalties.
Another reason you may breathe a sigh of relief? If your spouse paid enough to cover your tax obligation, says Ben Watson, a certified public accountant in Paducah, Kentucky.
“If you’re self-employed but your spouse has a W-2 job, the withholding from their pay may be enough to cover part or all of the taxes needed,” Watson says. You would need to be married and file a joint return with your spouse.
To know where you stand, complete IRS Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.
Why People Don’t Pay When They Should
People are generally aware that paying taxes on their earnings is important, so why do some self-employed individuals avoid it? It’s not always easy to manage.
A 2024 Adobe survey found the top tax-related challenges small business owners face are general financial stress (42%), understanding tax laws (41%), and keeping up with changing regulations (37%). Freelancers say their top tax struggles are filling out tax forms accurately (49%), understanding tax laws (48%), and managing general financial stress (42%).
“Many freelancers and small business owners live invoice-to-invoice,” Weisberg says. “When it’s time to send a check to the IRS, they push it off. It’s hard to make tax payments voluntarily.”
If this is your first year as a self-employed person, the difference in having taxes automatically taken out of your paychecks and doing it yourself can be overwhelming.
Prepare for Interest and Fees
Paying taxes late and not in the right amount can be expensive. Here are four examples of what you might have to pay.
1. Underpayment Penalty
First there is an underpayment penalty. The IRS charges interest on the amount you should have paid in the different quarters. How much you’ll be charged is based on the federal short-term rate at the time plus three percentage points.
When you complete your annual tax return, the underpayment will be reported and the IRS will apply the penalty to the amount you owe.
The IRS does offer a safe harbor rule, however. For most taxpayers, it won’t charge the underpayment penalty as long as you pay at least 90% of the tax debt for the current year, or 100% of the tax you owed for the previous tax year. The safe harbor rule also goes into effect if you owe less than $1,000 in tax after subtracting withholdings and credits.
You can get out of this underpayment penalty in a few other ways. For example, you may have had a serious illness or injury or a family member died, or there was a local disaster that made meeting your estimated tax payment on time very difficult. Or, you reached the age 62 and retired or became disabled in the current or prior tax year and had a reasonable cause for not making the payment.
[10 Common Life Events That Can Impact Your Taxes]
2. Late Payment Penalty
Late payment penalties are typically imposed if you don’t pay your estimated taxes by the due date. This penalty is currently 0.5% of the amount owed for each month (or partial month) the payment is delinquent, up to a maximum of 25%.
3. Failure-to-File Penalty
Even if you don’t have enough money to pay the entire tax bill, it’s important to still file your tax return. If you don’t, the IRS will add a failure-to-file penalty, which is 5% of any unpaid taxes, up to 25% of the total tax bill.
[What Happens if You Don’t Pay Your Taxes?]
4. Interest Fees
Meanwhile, the IRS will be charging interest on the unpaid balance, which compounds daily until the tax is paid in full. For tax year 2024, it is 8%.
What to Do if You Should Have Paid but Didn’t
There is no hiding from the IRS. Companies that sent you 1099 forms also sent the IRS the same information. This means the IRS knows that you received income, but taxes were not withheld.
So, if you didn’t pay your estimated payments, get ready to deal with a potentially large tax debt, says Ashley Morgan, an attorney who specializes in tax resolution and bankruptcy in Herndon, Virginia.
“If you can pay the balance off before April 15th, great,” Morgan says. “It can help you avoid some of the penalties.”
You can satisfy your IRS bill using direct pay or the U.S. Department of the Treasury’s Electronic Federal Tax Payment System.
If you can’t pay in full and have no other tax balances, the IRS will grant a 72-month payment plan upon request.
“As long as you owe under $100,000 it’s pretty easy,” Morgan says. “You can do it directly through the IRS’ website or just call them.”
If you can’t afford the payments involved in that payment plan, Morgan suggests looking into an installment agreement, where the payments are based on your income and expenses, which can be more affordable.
Just remember that any payment arrangement you make with the IRS is still subject to interest and penalties.
“I usually recommend that you set up a plan for the lowest amount possible and pay extra whenever you can,” Morgan says.
“Paying prior years taxes can be a burden on your budget, especially if you’re paying estimated tax payments this year. If you default on the agreement, it puts you back into collections,” she adds.
This Year, Adjust Your Strategy
In the future, you can make your life much easier by paying your quarterly estimated taxes by the due dates set by the IRS. Use Form 1040-ES to figure and pay your estimated tax.
One of the most effective ways to ensure you have the cash available is to set up a separate business bank account for this purpose.
“When you get paid, put a portion of the money into that account knowing you will use it only for taxes,” Watson says. “This way, you won’t accidentally spend it.”
You can also minimize the problems associated with paying too little by consulting with a tax professional, using good accounting software or downloading specialized tax apps. The more you do now to stay organized and prepared for the upcoming payments the better.
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What to Do if You Didn’t Pay Estimated Taxes originally appeared on usnews.com
