The IRS expects you to pay taxes as soon as you receive income, even if you are receiving unemployment benefits. You can achieve this through estimated income tax payments or by having taxes withheld from your paychecks. However, this may be challenging, especially for freelance workers. If you were unemployed or had irregular income during the past year, things may be tougher. Here are some tips to ensure you pay your taxes to the IRS on time and avoid any penalties.
Adjust Your Tax Withholdings
Workers who have been employed throughout the past year might be better off than others when it comes time to file taxes by the April deadline. If you are an employee, you likely have already paid taxes while earning your income because taxes were withheld from each paycheck. This process was based on the information you provided on your W-4 form. Based on this form, your employer forwarded this money to the IRS on your behalf throughout the year.
Your tax withholdings should be very close to the amount you owe if you filled out your W-4 form correctly and did not have any additional sources of income that you did not take into account. The W-4 form can be changed as needed. The IRS recommends reviewing and updating the form periodically to ensure that the information you initially provided to your employer is still accurate. This includes:
- Your marital status
- The number of dependents you have
- The tax credits you are likely to claim
- The tax credits you will not be able to claim again this year
Have you taken a side job to earn extra income during a tough year? You can request additional tax withholding from your paycheck to help cover this income. There is a specific line on the W-4 form for this purpose. You should also update your tax withholdings if you experienced a significant life change during the past year. This could be the case if you were:
- Married
- Divorced
- Having a child
- Having a child who becomes non-dependent in the tax year
The IRS offers a helpful tool to estimate tax withholdings on its website to assist you in achieving the correct tax withholdings.
Estimated Quarterly Payments
Are you self-employed or prefer not to report any additional income you may have to your employer? You can make estimated quarterly income tax payments. These payments should be based on the amount you will likely owe at the end of the year from taxable income.
If you are a sole proprietor or independent contractor, you need to make estimated payments. Your clients usually do not withhold taxes from payments made to you. The IRS imposes penalties if you do not and are short when it comes time to file. However, other taxpayers can also make payments this way.
To avoid an estimated income tax penalty, make sure to pay at least 90% of your total tax bill by the end of the year if you suspect that you will owe $1,000 or more in income tax for the year. These estimated payments to the IRS are due four times a year. The due dates are January 15, April 15, June 15, and September 15 each tax year.
You can use the 1040-ES tax form to compute and pay your estimated tax payment.
Unemployment Benefits
While taxpayers received a tax exemption on unemployment income earned in 2020, there is no similar tax exemption for unemployment income earned in the tax year 2021 or the tax year 2022.
Considered
Unemployment benefits are taxable income and you will need to pay federal income tax and possibly state income tax on this amount when you file your tax return.
The IRS provides an interactive tool on its website to help you determine whether your unemployment benefits are taxable.
You should receive Form 1099-G in January which shows the amount you received as unemployment benefits. It should also indicate the amount that was withheld for taxes if you arranged for withholding.
If taxes were not withheld from your unemployment compensation, you can also make estimated quarterly payments to help cover the taxes owed on that income.
Stimulus Checks
The federal government issued stimulus checks to help many Americans during the coronavirus crisis in 2020. This amount was not a source of taxable income.
Officially called “Economic Impact Payments” (EIPs), you may have even received a third stimulus check at the end of 2020 or the beginning of 2021. This amount is not included in your total taxable income.
Conclusion
Your income amount and how you earn this money can change from year to year. It’s important to understand how taxes work with this income, whether you have tax withholding from your wages or estimated quarterly payments. Whatever you do, take the time to understand your income and how you can plan ahead for tax season so that you are not surprised by an unexpected tax bill.
FAQs
What are estimated tax payments?
Estimated tax payments are quarterly payments that individuals can make to the IRS to help them pay their taxes throughout the year. You can opt for estimated tax payments if you work as a freelancer or independent contractor. You can also make estimated tax payments if you are receiving unemployment income and will not have enough taxes withheld. Estimated tax payments can help avoid an unexpected tax bill and penalties from the IRS.
When are taxes due?
The main tax bill is due on April 15 (or the next business day if April 15 falls on a holiday or weekend). April 15 is also the due date for estimated quarterly tax payments. There are other due dates for estimated quarterly tax payments on June 15, September 15, and January 15.
Where can you send estimated tax payments?
You can send estimated tax payments by filling out a coupon and then mailing a check or money order to one of three addresses, depending on where you live.
- If you live in Alabama, Arizona, Florida, Georgia, Louisiana, Mississippi, New Mexico, North Carolina, South Carolina, Tennessee, or Texas, please send it to IRS, P.O. Box 1300, Charlotte, NC 28201-1300.
- If you live in Arkansas, Connecticut, Delaware, the District of Columbia, Illinois, Indiana, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Missouri, New Hampshire, New Jersey, New York, Oklahoma, Rhode Island, Vermont, Virginia, West Virginia, or Wisconsin, please send it to IRS, P.O. Box 931100, Louisville, KY 40293-1100.
- If you live in Alaska, California, Colorado, Hawaii, Idaho, Kansas, Michigan, Montana, Nebraska, Nevada, Ohio, Oregon, North Dakota, South Dakota, Pennsylvania, Utah, Washington, or Wyoming, please send it to IRS, P.O. Box 802502, Cincinnati, OH 45280-2502.
Updated by Hilarey Gould
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and of high quality.
IRS
The IRS. “Form W-4, Employee’s Withholding Certificate”.
The IRS. “Pay as you go, so you don’t owe: A guide to withholding, estimated taxes, and ways to avoid an underpayment penalty”.
The IRS. “Estimated Taxes”.
The IRS. “When to Pay Estimated Taxes”.
The IRS. “Form 1040-ES”.
The IRS. “Questions and Answers on Economic Impact Payments – Topic J: Reconciling Your 2020 Tax Return”.
The IRS. “Form 1040-ES Estimated Tax for Individuals”.
Source: https://www.thebalancemoney.com/how-to-get-ahead-on-tax-payments-for-next-year-5078587
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