Gig workers: Here comes an estimated tax deadline
If you’re a gig worker or otherwise self-employed, and you don’t have taxes withheld from a paycheck, you likely have to make quarterly estimated tax payments to the IRS. Be advised that the fourth quarter 2021 estimated tax payment deadline for individuals is coming up on Tuesday, January 18, 2022.
A pay-as-you-go system
If you do have some withholding from paychecks or payments you receive but you receive other types of income such as Social Security, prizes, rent, interest and dividends, you may still have to make estimated payments. And if you fail to make the required payments, you may be subject to a penalty as well as interest.
Generally, you need to make estimated tax payments for 2021 if you expect withholding to be less than the smaller of 90% of your tax for 2021 or 100% of your 2020 tax. (The applicable amount is 110% of your 2020 tax if your 2020 adjusted gross income was more than $150,000, or $75,000 if married filing separately.)
Sole proprietors, partners and S corporation shareholders generally must make estimated tax payments if they expect to owe $1,000 or more in tax when filing a tax return.
Quarterly due dates
If you’re new to estimated tax payments, be prepared to submit them throughout the year. The due dates are typically April 15, June 15, September 15 and January 15 of the following year. However, if the date falls on a weekend or holiday, the deadline is the next business day.
Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher, or by credit or debit card.
Seasonal businesses
Most individuals make estimated tax payments in the four installments. You simply determine the required annual payment, divide the number by four and make four equal payments by the due dates.
However, you may be able to make smaller payments during some quarters under an “annualized income method.” This can be useful to people whose income isn’t uniform over the year, perhaps because of a seasonal business. You may also want to use the annualized income method if a large portion of your income comes from capital gains on the sale of securities that you sell at various times during the year.
The correct amount
Estimated tax payments are just like paying a traditional tax bill in that you want to fulfill your obligation without overpaying the federal government. Contact our firm with any questions you may have about setting up estimated tax payments or using the annualized income method.
Budgeting for baby
Babies bring joy and excitement. They also bring substantial adjustments to the family budget! According to U.S. News and World Report, after adjusting for inflation, it costs about $267,233 in 2021 dollars to raise a baby to age 18 (based on previously published Bureau of Labor Statistics data). That’s a daunting number, to be sure. Fortunately, there are some things you can do to, shall we say, pacify the challenge.
Check your insurance
Life and disability insurance are critical. Life insurance provides financial protection if an income-earner in your family dies. Term insurance can be a cost-effective option. It offers protection for a specific period, such as 20 years (at which point many children will be relatively self-sufficient, and the loss of income less harmful). Of course, you’ll also need to ensure that your will names a guardian to look after your children in case of your death while they’re still minors.
Disability insurance provides financial protection if a breadwinner becomes disabled and no longer can earn a living. While some employers offer disability insurance, the policies often don’t provide enough income to cover all expenses. And Social Security disability benefits might not offer the protection you expect. For instance, to obtain the benefits, the breadwinner typically must be unable to work at any job. So, consider purchasing your own policy that will pay if you can’t continue in your current job. The distinction might make a difference.
Review tax breaks
Eligible parents can receive a valuable Child Tax Credit. And if you pay a caregiver to watch your baby so you can work, you may be able to claim the dependent care credit. For 2021, depending on your income, this can be up to 50% of eligible childcare expenses, up to $8,000 for one child, or $16,000 for two or more. The caregiver typically can’t be a dependent, your spouse or a parent of the child.
Another option is a dependent care Flexible Spending Account (FSA). This is an employer-sponsored program that allows parents to set aside up to $10,500 (for 2021) pretax annually (up to $5,250 if you’re married and file separately) to cover qualified childcare expenses. It’s important to note that you can’t use both the credit and the FSA for the same expenses.
Start saving for college early
The sooner you start saving for your baby’s education, the more you can leverage the value of compounding. If you save $200 per month starting at your baby’s birth and earn a 6% return, you’ll have nearly $78,000 in 18 years!
One of the best options, potentially, is a Section 529 education savings plan. It allows you to save for college expenses, as well as K-12 tuition expenses. Contributions aren’t tax-deductible for federal purposes, but many states offer tax benefits. Withdrawals used for qualified education expenses (limited to $10,000 per year for K-12 tuition) aren’t subject to federal income tax, and typically not subject to state income tax.
Get expert advice
Whether you have a baby on the way or your family expanded earlier in the year, it’s important to make sure you’re taking the right steps to ensure your child’s financial security. We can offer advice to help you evaluate various options and maximize your tax savings.