For most Georgia residents, every pay period comes with a reminder that the federal government is taxing their wages through withholdings. When an individual looks at their pay stub, they may see that a portion of their income or wages has been deducted from their take-home pay for the purposes of satisfying their tax obligations. This is one of the most common ways that American workers pay their income taxes each year.
However, there is another way that workers can pay their income taxes to the federal government. That is through the payment of estimated taxes. This post will explore the concept of estimated taxes, but all readers are reminded that no part of this post should be read as legal advice. When concerns about income taxes arise, it is a good idea for individuals to seek the counsel of a trusted tax lawyer for guidance and support on addressing their financial and legal needs.
The basics of estimated taxes
As mentioned, most workers pay their federal income taxes through withholdings in their paychecks. Their employers pay their taxes for them before providing workers with periodic payments of wages or salaries. When individuals earn income outside of traditional employment settings, though, they may not have withholdings taken out of their pay.
This is when estimated tax payments come into play. Every quarter (every three months) of the year, individual subject to estimated taxes must pay the Internal Revenue Service their estimated tax obligations for their previously untaxed income. Not everyone will have to pay estimated taxes. There are certain factors that may make an individual more likely to have to pay estimated taxes than others.
Who pays estimated taxes?
Individuals who work outside of traditional employment settings may have to pay estimated taxes. A person who is self-employed, therefore, may not have traditional income taxes removed from their pay and may have to pay their taxes through estimated payments. Additionally, individuals who receive pay through dividends, alimony, prizes, and awards may be obligated to pay estimated payments to the IRS for their non-traditional income.
What happens if a person does not pay estimated taxes?
The IRS expects individuals to pay taxes as they earn income. That is why most people see their income taxes removed from their paychecks. However, if no one is removing tax payments from their wages, individuals may accumulate growing tax debts based on their failures to pay the IRS.
When this happens, individuals may have tax payment deficiencies that are subject to penalties and fines. This can create bigger tax burdens for individuals who may not have expected to have to pay taxes on their nontraditional income. When this occurs, it is important for individuals to understand their obligations and rights under the applicable tax laws. Their trusted taxation attorneys can advise them of how best to remedy tax debts and remain in good standing with the IRS.