If you are a freelancer, self-employed, or have income from sources that do not withhold taxes or your withholding is insufficient, you may be required to pay estimated tax to the US government. Here’s what you need to know about estimated tax:
What is estimated tax?
It is very common for someone working in the USA or working for a US company abroad to have US taxes withheld from each pay-check (this is not common in Hong Kong). Estimated tax is a system used by the US government to collect taxes on income that is not subject to withholding. This includes income from self-employment, rental income, investment income, and other sources.
How many payments are required and when are they due?
Most taxpayers (who are required to make estimated tax payments) are required to make four estimated tax payments per year, generally due on:
- April 15
- June 15
- September 15
- January 15 of the following year.
However, if you receive income unevenly throughout the year, you may have to adjust the amount of your estimated tax payments.
Who needs to pay estimated tax?
You are required to pay estimated tax if you expect to owe at least $1,000 in tax for the year after subtracting withholding and refundable credits.
How are estimated tax payments calculated?
To calculate your estimated tax payments, you will need to estimate your total income, deductions, and credits for the year. You can use the worksheet provided in IRS Form 1040-ES to calculate your estimated tax liability. You may also use IRS provided interactive tool to do so by visiting HERE. Alternatively, you can contact a professional tax consultant to help with your estimated tax calculation. You will need to make payments based on these estimated amounts, and may need to adjust your payments if your income or deductions change.
What happens when I don’t pay estimated tax payments?
If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You may also be charged a penalty if your estimated tax payments are late, even if you due a refund when you file your tax return.
In conclusion, estimated tax is a way for the US government to collect taxes on income that is not subject to withholding or insufficient withholding. Most taxpayers are required to make four estimated tax payments per year, generally due on April 15, June 15, September 15, and January 15 of the following year. You may need to pay estimated tax if you expect to owe at least $1,000 in tax for the year after subtracting withholding and refundable credits. You may be subject to penalties if such payments are not paid timely. Additional information about estimated tax payments can be found here: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
Disclaimer: This information has been prepared for informational purposes only, and is not
intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors or consult us regarding your own personal tax situation as this article was intended to be general in nature.