Some taxpayers may not know they owe a check to the IRS on Monday, which could leave them owing the agency big change next April.
More Americans are caught up in the problem, which involves quarterly estimated taxes or payments made to the IRS throughout the year for income that is not subject to withholding. Self-employed individuals typically have their federal, state, and payroll taxes withheld directly from their paychecks. But millions of Americans today earn extra money as freelancers or through their own businesses, where no taxes are deducted.
In these cases, taxpayers must send their estimated tax payments to the IRS quarterly, with the next due date being June 17. The IRS says working taxpayers can also avoid the problem by asking their employer to withhold more. money from their paychecks, but of course that depends on workers first being aware that they may owe additional taxes.
“Taxes are payable as income is earned, during the year,” the IRS said in a notice earlier this month about the June 17 payment deadline.
In other words, regardless of whether you're making money from a paycheck or a side gig, you have to settle with the IRS on a regular basis throughout the year, either through check withholding or quarterly estimated taxes. And here's the thing: Skipping this step can result in fines and penalties if you wait until April 15 of the following year to pay.
The number of Americans subject to estimated taxes is rising, with IRS data showing that 14 million people sent quarterly payments to the tax agency by 2023. That's a 16 percent increase from 2022, when about 12.1 million people paid the quarterly tax. The impetus for this increase is the growing number of people who are working or doing work they started their own businesses. A record 64 million Americans earned money through freelancing by 2023, a jump of 4 million from the previous year, according to an analysis by Upwork.
Higher penalties
Failure to pay estimated taxes can result in underpayment penalties, which have gotten tougher in recent years. That's because the IRS charges interest, based on the short-term federal rate, on the amount people underpay, and that finance charge has increased because of Federal Reserve rate hikes since 2022 .
The current IRS penalty assesses an 8% interest charge for underpayments, compared to 3% in 2021, when the Fed's benchmark rate was close to zero. In 2023, the average underpayment penalty rose to $500 per person, up from about $150 in 2022, IRS data show.
Who owes quarterly payments?
In general, self-employed people, gig workers, and people who own small businesses through sole proprietorships, partnerships, and S corporations must make quarterly estimated tax payments if they think they will have a tax liability of at least $1,000 when they file. .
Others may be on the hook, too, though, including investors who sell assets like stocks or bonds throughout the year, according to Fidelity (taxpayers can use this online IRS tool to determine if they may owe quarterly taxes).
Aside from June 17, the two additional payment dates for the current tax year fall on September 16 and January 15, 2025. (The first quarterly estimated tax deadline for 2024 was January 15 April.) Taxpayers can make payments online from their checking or savings account through an online account for individuals or IRS Direct Pay, or you can use IRS.gov/payments or the IRS2Go app to to payments by credit or debit card.
