Withholding tax is a worldwide phenomenon. Tax is deducted or withheld at source on the income earned by a person and acts as a tax credit when paying income tax for the year. In general the withholding tax is applicable to employment income. However if you are self-employed, for example you are a freelancer or a contractual worker. You obviously do not earn employment income and hence no tax is withheld on your earnings. This places a responsibility on you to calculate income tax yourself and make estimated tax payments as a law abiding citizen. You are required by the government to pay taxes on your income. If you are going to earn enough that a tax liability of at least $1000 may arise on it. The IRS and state government may charge a fine or penalty in case of non-payment of taxes.
As a general idea you owe taxes on your total earnings. These may consist of income from self-employment, rental income or property business income, capital gains due to disposal of capital assets and any other source of income. You calculate tax on these earnings by aggregating them and deducting all available allowable deductions. Then after determining which income bracket these earnings fall in, you multiply them by the relevant percentage to calculate the income tax liability. You may also owe self-employment SE tax that is levied on a person who actively earns income though self-employment.
The annual due date for tax payment falls in April. However, to avoid paying a large chunk of money annually, you can opt for quarterly payments. The four deadlines for tax payment on income earned in 2018 are:
January 16 2019 for income earned from September-December 2018.
There is a penalty of 4% for not paying estimated payments that is compounded until you make your payments.
If you have UNFILED RETURNS and you owe taxes the consequences can be very serious. Here is what happens if you fail to file or pay IRS taxes:
If you have an UNFILED RETURN on the due date you face a fail-to-file penalty if you owe taxes. The rate is 5% of the amount owed for every month for UNFILED RETURNS. However this penalty is limited to a percentage of 25%.
If you pay 60 days late your penalty will be the lower of $205 0r 100% of the tax you owe.
If you do not owe any taxes on UNFILED RETURNS then you do not have to pay a penalty. But you may face other consequences.
If you have UNFILED RETURNS and you owe a refund, you will not get the refund.
Similarly, failure to file for a potential tax credit to claim it, like the Earned Income Tax Credit (EITC), will result in losing the tax credit.
If you fail to file for loss relief on any losses that you have suffered in your trade or investment, you will not be able to carry them forward and your losses will go unrelieved.
You can always ask a professional’s advice on estimated payments and filing returns. Have us do the job for you. Visit our website.