| Special to South Bend Tribune
During the pandemic, I became part of the “gig” economy and didn’t know about estimated taxes. That cost me money in penalties and interest. Can you write a column that covers estimated taxes?
— B.B., email
Many of us are accustomed to the pay-as-you-go approach to income taxes. Put differently, taxes are withheld from our paychecks and, in most cases, the amount “held back” by the employer(s) more than covers the taxes owed. Note: about three-out-of-four taxpayers receive refunds from Uncle Sam.
The “gig” economy places people in the self-employed category which means they must make estimated income payments at both the federal and the state level. Payments to the IRS are made quarterly (though not exactly calendar quarters). The due dates for 2022 estimated taxes are April 18, June 15, Sept. 15 and Jan. 17, 2023 (shortly after Marcus Freeman leads the Fighting Irish gridders to their first national championship since 1988!).
The IRS offers multiple ways to make payments — the old-fashioned mailing a check (along with IRS Form 1040-ES), paying online or by phone and, more recently, using the IRS2Go app.
Taxes and the ‘new’ money: Tax Talk: Virtual or cryptocurrency is treated as ‘property’ by the IRS
At the federal level, the estimated tax situation for “gig” laborers involves a “double whammy” — income taxes and self-employment taxes. The income tax calculation includes the standard (or itemized) deduction amount and other provisions. Self-employment taxes put the “gig” worker in the role of both employee and employer. The rate of taxation is 15.3% — the FICA rate of 7.65% doubled — on net self-employment income. If a taxpayer anticipates that his/her income tax liability (after withholdings and refundable credits) will be $1,000 or more, estimated taxes must be timely paid to avoid a penalty.
Two so-called “safe harbors” exist at the federal level (1) If you estimate your withholdings and refundable credits (WARC) will handle at least 90% of your 2022 federal tax liability, no estimated taxes are due. (2) If your 2022 AGI is at or below $150,000 — $75,000 for Married Filing Separately — the WARC must be at least 100% of the 2021 tax liability. Taxpayers whose 2022 AGI exceeds these numbers encounter a WARC which is at least 110% of the 2021 tax liability.
Indiana’s estimated tax rules apply when, per the IT-40 Instructions, “You expect to owe more than $1,000 when you file your 2022 tax return.” Unlike Daylight Saving Time, in this situation, the federal government and Indiana are “in sync” — due dates for the estimated payments are April 18, June 15, Sept. 15 and Jan. 17, 2023 (GO IRISH!). Failure to meet these federal and state “safe harbors” results in filing Federal Form 2210 (and/or its state equivalent) and paying a penalty for underpaying your estimated taxes.
Filing as a Hoosier: Tax Talk: Some ‘ins and outs’ of the Indiana income tax return
“Gig” workers are not the only taxpayers required to make estimated tax payments. If you have interest, dividends, capital gains and/or other types of income where no tax is withheld and self-employment tax is not a factor (e.g., royalties, prizes and awards, retirement payments and certain gambling winnings), estimated taxes must be paid following the above provisions. So, if your NCAA men’s basketball brackets were not destroyed by St. Peter’s — or some other underdog — and you’re going to cash in later this week with a “windfall” of taxable income, be prepared to report the winnings and make an estimated tax payment on or before April 18, unless you meet the exceptions covered above or in our “go to” IRS reading — when we’re having trouble getting to sleep — Publication 505 Tax Withholding and Estimated Tax.
Finally, don’t forget to think beyond income. For example — have life-events like marriage or the birth of a child changed your tax picture? Has there been an income tax law change that impacts what you need to pay? Is your income seasonal, meaning estimated payments may only be required for certain quarters?
Ken & Klee’s income tax bulletin board. A $125 refund check will be sent to over 4 million Hoosier taxpayers per a recent announcement by Governor Eric Holcomb. An automatic six-month extension to file your income tax return is available. Next week’s column will cover the specifics of both of these topics.
Rick Klee served as the tax director at the University of Notre Dame from 1998 through August 2019. A retired CPA, Klee is a graduate of Notre Dame. You can contact him at [email protected].
Ken Milani is a professor of accountancy at Notre Dame where he served as the faculty coordinator of the Notre Dame Tax Assistance Program. Contact him at [email protected]. E-mail questions to either.