Most working adults do not need to worry much about federal income tax obligations. They file paperwork with their employers that allows for automatic deductions from their paychecks. Their employers pay estimated taxes to the Internal Revenue Service (IRS) and state tax authorities with every paycheck issued.
Such arrangements are beneficial for employees, who only have to consider their tax obligations once a year when filing their annual income tax return, reconciling estimated payments with their total obligations. Others are not quite so fortunate.
They may need to make estimated tax payments on their own behalf to avoid fees, interest and falling far short of the total amount of tax due at the end of the fiscal year. Who has a responsibility to estimate and pay their own income taxes?
Independent contractors
Self-employed professionals, also known as independent contractors, are responsible for fulfilling their own income tax obligations. They have to retain funds to cover their tax obligations.
Those who have just begun working as self-employed professionals have a grace period during their first year. After filing their first annual return as a self-employed professional, they have an obligation to make quarterly tax payments that cover most, if not all, of their final tax obligation for the year.
Businesses and business owners
Successful companies and business owners generally need to make estimated income tax payments as well. The owner-operator of a small retail establishment likely needs to pay estimated quarterly taxes for the business.
Those running professional practices may also need to pay quarterly based on company revenue. Even if the owner is technically an employee receiving hourly wages or a salary, the business itself likely needs to pay estimated taxes.
People with diversified income streams
There are many sources of income that are not subject to payroll tax withholding. Maybe a successful professional has residential real estate holdings that they lease to others. Perhaps an employee who earns a salary also has investment accounts that return dividends most years.
Those who received income from untaxed sources generally need to estimate that income and pay taxes on the additional income they received, even if their employers withhold funds based on their salary or hourly wages. The failure to make estimated quarterly tax payments can result in penalties that can prove quite costly.
Professionals facing income tax controversies or claims of underpayment may need help communicating with the IRS and limiting the consequences they face. Discussing tax responsibilities and reviewing IRS letters with a legal professional can be beneficial for those facing allegations of unpaid taxes or other compliance issues.
