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Should I Be Paying Estimated Taxes?

Many taxpayers assume that they only need to worry about taxes once a year, but some are required to pay estimated quarterly taxes. If you fall into this category, and you fail to pay them, you could face stiff penalties. It is a good idea to see if you are required to pay quarterly taxes and how to do it.

Who Needs to Pay Quarterly Taxes?

Workers who receive a W-2 pay a portion of each paycheck to Federal Taxes. The IRS requires regular payments throughout the year for wage earners. Many who are self-employed or have other income, such as alimony, dividends, capital gains, prizes, or awards are also expected to make regular quarterly payments to the IRS. If you fall into this category and you do not make the required payments, then you could face penalties or interest.

Those who are sole proprietors, partners, or shareholders in an S corporation typically expect to owe more than $1,000 when the return is filed. If you recently started a self-employed business, then it is a good idea to see if you are required to file quarterly taxes.

Exclusions and Exemptions

Even if you fall into a category where you would be required to file quarterly estimated taxes, the IRS has a few exclusions to this rule. To be excluded, you must meet all three of the criteria to avoid filing quarterly taxes.

You owed no taxes in the previous year.
You were a U.S. resident or citizen the entire year.
Last year's taxes covered all 12 months of the year.

What Are Underpayment Penalties?

You are expected to pay at least 90% of next year's taxes or 100% of the previous year's bill. If your adjusted gross income is over $150,000, you will need to pay 110%. If you are not caught up by April, then you could face a larger tax bill and underpayment penalties.

When Are Estimated Taxes Due?

Estimated taxes are due four times a year, April 15, June 15, September 15, and January 15. On each filing date, you pay taxes for the previous quarter's earnings. For instance, on April 15, you pay for any earnings for the first quarter of the year. June 15, you pay any taxes for the second quarter of the year, etc.

Some taxpayers might benefit from paying their final quarter's taxes before December 31 of the previous year. If the 15th is on a weekend or federal holiday, the deadline is moved to the next business day.

Estimation and Penalties

You can estimate the quarterly taxes you owe by using and submitting IRS form 1040-ES. This form asks you to estimate your expected income for the quarter. If you underestimate the amount, you could own penalties and interest. The IRS will return the difference of any overestimate to you when you fill out your yearly tax return on April 15.

If you owe penalties or have underpaid your taxes, the IRS will send you a notice. Those who owe less than $1,000 will not have to file estimated taxes or pay a penalty. If you pay at least 90% of your estimated taxes by the deadline, you will not owe a penalty if you make under $150,000.

Special Situations

If you have seasonal income, you will not have to file or pay estimated taxes until you have earned income. You can pay either the entire amount owed by September 15, or you can split it into two payments. Farmers and fishermen only have to file once a year. They must file by March 1.

If you pay all the taxes you owe at that time, you will not face a penalty. Paying less than the amount owed could result in a penalty for the entire tax year. For this rule to apply, you must earn at least two-thirds of your income through these means.

The gig economy means that many are finding self-employment opportunities, either as a main source of income or in addition to their W-2 job. This means more people now have to file quarterly estimated taxes than in the past. If you have recently entered the gig economy, then it is important to find out if you must file quarterly taxes. When in doubt, it is a good idea to find a qualified tax professional who can help.

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Understanding The Dependent Care Credit

If there's someone in your household who currently depends on you to provide them with financial support, you may be eligible for the dependent care credit, which can be claimed when filing your annual tax return. This credit is designed to provide you with a portion of the funds that you spent on care during the year. If applied properly to your tax return, you may be able to lower the amount of tax you owe by hundreds or thousands of dollars.

What Is the Dependent Care Credit?

The dependent care credit is part of the Child and Dependent Care Tax Credit. This credit can be calculated by using your income as well as a percentage of the expenses you paid when caring for the qualified individual.

For the 2021 tax year, the dependent care credit grew substantially and is possibly refundable. As long as you currently meet all of the other requirements, you may be able to claim this credit even if you don't owe any taxes for the year. Keep in mind that any taxpayer who has earned more than $438,000 for the year isn't eligible for the dependent care credit.

How to Determine Eligibility

You may be eligible for the dependent care credit if you:

Paid for a certain amount of care during 2021 for a qualifying dependent who was unable to care for themselves and lived directly with you or your family for at least half a year.
Spent less money on dependent care in 2021 than your entire annual income. In the event that you're filing a joint tax return with your spouse, the money you spent on care for the year needs to be less than the total income for the spouse who has the lowest earnings.
Needed the dependent care in order to work or search for work. For a two-parent family, it's essential that both spouses need dependent care to work or search for work unless one of the spouses was unable to care for themselves or was a full-time student.

All three of these requirements must be met for you to qualify. Keep in mind that any dependent care can qualify, which included family day care, vacation day camps, care provided by another relative, or care at a center. If you also qualify for the CTC and EITC, you can still seek the dependent care credit.

Identifying How Much You Can Claim

The amount of credit you receive largely depends on your annual income as well as the amount of money you spend on dependent care for the year. Any money you receive from an employer for child or dependent care expenses should be subtracted from the total amount of care expenses that qualify for this credit.

You should then compare the claimed expenses with your total earned income. The smallest of these amounts can be claimed as allowable expenses. The credit you qualify for is a percentage of these expenses. If your income is high, your percentage will be smaller, which means that your credit will be lower.

The American Rescue Plan has changed how much tax credits are able to be claimed for the 2021 tax year. As mentioned previously, these credits are fully refundable. For the 2021 tax year, this tax credit involves:

The qualifying expenses for this credit have risen from $3,000 to $8,000 for one qualifying dependent and from $6,000 to $16,000 for at least two qualifying dependents
The total percentage of expenses that this credit can be applied to has increased to 50% from 35%
This credit can't be obtained by anyone who has more than $438,000 in 2021 adjusted gross income

The max amount that you can contribute to a flexible spending account for dependent care has risen from $5,000 to $10,500.

The dependent care credit gives you the opportunity to reduce your tax bill or obtain a refund based on the amount of dependent care expenses you paid throughout the 2021 tax year. This credit is available to you even if you have applied for the Child Tax Credit and Earned Income Tax Credit.

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