 Internal Revenue Service R.R.S. Tax News final 2022 quarterly estimated tax payment due January 17th. Honestly, look at the way the government delivers that one-two punch. Yesterday they tell us to read the taxpayer bill of rights. Today they deliver the actual tax bill. One, two, pow, you're done. I mean, honestly, wouldn't it be great if you could invoice clients the way the government does? You're like, yeah, the job, whatever that is, may be done, you know, sometime next year. But we would like you to give us quarterly installment payments like now. Installment payments that you calculate. And the clients like, but how am I going to know how much I owe until the job is actually done? And you're like, that's your problem, client. Just make sure you don't underestimate your quarterly installment payment. So we'll hit you with penalties and interest. IR 2023-01 January 4th, 2023 Washington. Many taxpayers make quarterly estimated tax payments. There's a link to that here during the year to stay current on their taxes, but many who should overlook this step. Let's first take a step back and think about when the government demands your money in general. So we know that we have to file by April 15th following the tax year in question generally, and then possibly we can go on extension from that point for tax year 2022. That means we have to file around April 15th of 2023. Now that leads a lot of people to think that they would have the option if they so choose to pay all of their taxes by April 15th of 2023 for tax year 2022. But that the government's kind of trying to help them out by making installment payments during the year or withholdings from the paycheck during the year. But that's not exactly the case. The real idea here is the government wants their money sooner, and therefore they're going to impose penalties and interest if you don't make the payments sooner. So you don't really have an option of saying, well, I could just pay this lump sum when I file my taxes, but I'm going to decide to make the payments earlier than that in order to not end up with this tax bill a year. Know what you're really doing is you're paying the taxes earlier than that in order to avoid penalties and interest. And it's kind of an important distinction because I think the government kind of implies that that's the case as well, that they're basically helping you out by having the installment payments and so on. And so it's kind of this type of gaslighting kind of thing that I think goes on sometimes where it says, we're trying to help you. We're just trying to help you. It's like, no, they want their money sooner. You know, that's the point of the payments that are going to happen sooner. So what's our goal here? We're trying to avoid the penalties and interest that would accumulate if we had to pay, if we paid all of our money at the end of the year when we actually file the tax return. Okay, so how is that normally going to be done? Most people are going to be W-2 employees, and therefore they're actually required that the employer is required to make withholdings based on the information you give them on a W-4 type of form. And this could be somewhat convenient, but again, it kind of results in us as the taxpayers being somewhat passive, not actually engaged in the process. So sometimes we don't understand exactly how the whole system is working with it. And that could be an issue when we move from that kind of system, when they're just taking it out automatically from our paycheck to, like say, we have our own business, we start gig work, we start some work on the side, or even we work our entire careers with the money being pulled out of our W-2 and then in retirement, we have a bit different structure because now we might be taxed on the money that we take out of our retirement accounts, and we have to deal with estimated tax payments in a way possibly that we've never had to deal with in the past, because we've been kind of a passive participant, because that's the way the system's been set up at that point in time. So a lot of people when they move, and this has happened a lot in the last couple of years, because people have been shuffling around in different jobs and possibly picking up gig work and so on, they get into a gig work or schedule C type of business, their own sole proprietor business, and they just don't do the tax part of it correctly and basically wait until the tax time happens when they file the tax return and then they get hit with a huge tax bill. So even when the business was doing well, they didn't take into consideration the massive amount of taxes that come into play when you're talking about income taxes as well as self-employment taxes, both the employer and employee portion of those self-employment taxes. So the bottom line is that if you're picking up the gig work or if you're thinking of moving from the W-2 to a schedule C type of business, you want to make sure that you're doing the estimate of tax payments because, again, you don't have the option of just waiting until you file the tax return. You got to make the quarterly payments to avoid the penalties and interest on it. Now that's often a problem for sole proprietors, especially new ones, because they have no idea how much money they're going to make. They don't know what their expense is. They don't have any past data to really get a good idea of how much you're going to earn in a particular year after deductible expenses and so on. Many of them are not spectacular at making their books, tracking all of their stuff. They're just trying to generate revenue at that point because that's the focal point of the business at that time. So it could be quite difficult to try to figure out what taxes you're going to owe before you actually file the tax return, but you have to do that and you want to take into consideration not only the income tax but also self-employment tax. So that's my general rant on it. Okay, the Internal Revenue Service today urged those who paid too little tax in 2022 to make a fourth quarter payment on and before January 17th to avoid an unexpected potential tax bill or penalty when they file in 2023. So you could see how they kind of frame it here. They're trying to say in order to avoid an unexpected potential tax bill, kind of implying like you should pay now or else you're going to have a tax bill during tax time. And it would still be good maybe to pay in installments in order to avoid a bill, but what they're really saying is, no, we're going to hit you with a penalty. That's what you're trying to avoid because that means you're going to be paying over and above more taxes than obviously you otherwise would. So it's not just the timing thing. It's the fact you're trying to avoid penalties and interest. Okay, taxes are normally paid throughout the year by withholding tax from paychecks or by making quarterly estimated tax payments to the IRS or by a combination of both. So if you're going from a W-2 employee to say gig work, then maybe you can just adjust your W-4 to pick up the fact that now you have some sole proprietor work on the side as well that you want to make sure you're taking care of with the withholdings, but you might not have enough withholdings to do that if you're gig work or if your schedule C is getting substantial in revenue, and therefore you'll have to make quarterly payments generally. So individuals do this because income taxes are paid as you go, meaning taxpayers need to pay most of their tax during the year as income is earned or received. So obviously as you earn the money, the government wants to get paid. If you're getting a W-2 employee, they want to take your money out of every paycheck. If you're a sole proprietor, then you can do it quarterly because they realize that you have to kind of at least have some time to figure out how much you might actually owe them. Now this pay as you go system kind of makes, they're kind of acting like they're your partner or whatever and they're, you know, you're splitting the profits with them as you earn it. It wouldn't be that bad if the tax system was easy and transparent, meaning if it was a flat tax and, you know, the deductions weren't changing all the time and the tax code wasn't massively complex, then, and you just say, okay, I'm going to owe you 10% or I owe you 20% or I owe you 25%. And it is what it is. Then it would be at least a little bit easier to figure out, you know, how much you owe them, but that's not the way it is. We know that we have a progressive tax, which means that, and we have a lot of complex deductions and the credits have been changing massively, especially over the last couple years. So that means it becomes much more difficult to kind of project what your taxes are going to be, especially if you don't know what your income will be at the end of the year because your tax rate will be dependent upon how much money you made in terms of the tax brackets, right? So if you can't just say, well, I earned 20,000 in the first quarter, so I'm just going to pay you, you know, 15% of that. Well, you might not be in a 15% tax bracket. You might be in a higher tax bracket depending on your yearly earnings, not your quarterly earnings or your monthly earnings. So that's where the complexity comes in, where you just, most small businesses, they just don't know, right? They have no idea, you know, how to approach that a lot of times. So who needs to make a payment? Taxpayers who earn or receive income that is not subject to tax withholding such as self-employed people or independent contractors should pay their taxes quarterly to the IRS. In addition, people who owe tax when they file their current year tax return often find themselves in the same situation when they file the next year. Taxpayers in this situation normally include those who itemized in the past but are now taking the standard deduction, two-wage earner household, employees with non-wage sources of income such as dividends, those with complex tax situations and or those who fail to increase their tax withholding. So the general idea would be that I can kind of predict my future taxes based on what happened in the past. Now, there's a problem with that right now in the fact that the tax code has changed massively over the last couple of years and also on the low income side of things, right? So that makes it a lot more difficult to kind of make projections about your tax bill in the future when the tax code is changing a lot on a year-to-year basis. So you have to actually do more kind of complex projections to try to get an accurate feel. Also, people's movements between jobs have been changing massively over the last few years as well and they've been moving in and out of multiple jobs and going from W-2 jobs to gig work. So again, you can imagine in a situation where you had like a one-income household that was in a tax situation where the tax code didn't change a lot that even if the tax code was complex, you can come up with a fairly good estimate after a couple of years. But if you're going from gig work to W-2 work to two people working in a family to one people working in a family and the tax code is changing all the time, well, now you're in a situation where there's a lot more complexity and so you've got to actually do estimates and there's actually a tax software on the IRS website to help to do those estimates. But many normal people are having to do a little bit more complex work to get the estimates right at this point. So what's taxable? The IRS reminds people that most income is taxable. So the code generally says everything's taxable that unless we say otherwise on the income side. So that's the kind of way it's set up. So this includes unemployment income, refund interest income, and from the gig economy. They want to stress that one. There's a link to the gig economy and digital assets. When estimated quarterly tax payments, taxpayers should include all forms of earned income, including from part-time work, side jobs, or the sale of goods. Also, various financial transactions, especially late in the year, can often have an unexpected tax impact. Examples include year-end and holiday bonuses. So obviously if you based your tax withholdings on a set of income and then you got a bonus that was not included and the bonus was substantial, then that's going to throw off your whole all your estimates that you made before because that could put you in a different tax bracket. Stock dividends, similar situation, capital gain distributions, similar thing, mutual funds, stock bonds, virtual currencies, real estate, or other properties sold at a profit. Delay in requirement for form 1099k. On December 23, 2023, the IRS announced the calendar year 2022 will be treated as a transition year for the reduced reporting threshold of $2,600, the transition year. It's a favorite term of the bureaucratic kind of thing. I worked at places where every year was a transition year. Don't worry. It's just it's transition year. It's everything you just don't you got to embrace the change, embrace the change. Anyway, they're going to delay in the trend. So for calendar year 2022, third party settlement organizations who issued form 1099k, there's a link to their are only required to report transactions where gross payments exceed $20,000. And there are more than 200 transactions. Last week, the IRS also issued frequently asked questions. There's a link to that here to help people who may receive form 1099k. Reporting does not impact a taxpayer's responsibility to accurately report all income, whether or not they receive a form 1099k or other information returned, such as form 1099 miscellaneous information, form 1099 NEC, non employee compensation, etc. So how to make an estimate of tax payment. They have a lot of options. The IRS does on how to pay them. They've been working on this, which is actually a good thing because it used to be kind of hard to pay them. And then they would charge you penalties and interest for not paying them. It's like, it's like they didn't open the check that you sent them in the mail, and then they send you a bill with added penalties and interest because they didn't open the check that you sent. Okay, so at least they're getting better at that. So the fastest and easiest way to make an estimated tax payment is to do so electronically using IRS direct pay. There's a link to that here. Taxpayers can schedule a payment in advance of the January deadline. Taxpayers can now also make a payment through the IRS online account. Whoo. There's a link to that. So there they can see their payment history, any pending or recent payments, and other useful tax information. You got the electronic filing tax payment system, otherwise known as the EFTPS. That's an excellent choice as well, they say. So the IRS does not charge a fee for these services, plus using these or other electronic payment options ensures that a payment gets credited properly. More information on other payment options is available at pay online. Notice they don't say send us a check right here. I think you can still send them a check, but they don't like that. But you know, if you want to piss them off, you might be able to hold on to your money a little bit longer. I don't think they've hired a bunch of new employees, but I haven't quietly skeptical that they do anything actually helpful at this point in time. We'll see. But if you send them a check, as long as you're avoiding the penalties and interest, maybe that would be a way to go. You know, I mean, the electronic stuff, when they're paying you, you know, you want to set up the electronic thing so you get paid faster. But if you're paying them, you know, as long as you're not getting billed, just throw the check in the mail and they can fumble over it over there and whatnot. No, I'm just kidding. It's probably I still pay them electronically because I'd rather just get the verification and that makes it easy. So act now to avoid a penalty. Either payment method with holding or estimate a tax payments or a combination of the two can help avoid a surprise tax bill at tax time and the accompanying penalty that often applies. So notice how they phrase it all the time. We're just trying to help you avoid the tax bill that might come up. No, they're going to hit you with penalties. They're going to that's what that's what the stick is. They're not they're gaslighting you. That's they're not helping you. They're trying to they want their money now or the charging penalty. Okay, if a taxpayer failed to make required quarterly estimate of tax payments earlier in the year, making payments soon to cover these missed payments will usually lessen and may even eliminate any possible penalty. Stay current using the withholding estimator. So this is actually a pretty good tool this withholding estimator. And you almost everybody I think has to use it these days because of all the changes in the tax code. If you're going to get your tax withholding right, whether you need to adjust your W for withholdings with your employer or possibly adjust your withholdings as a self employment individual or for estimated tax payments. So you got the tax withholding estimator it's available in irs.gov irs.gov irs.gov and it can often help people determine if they need to make an estimated tax payment. It also helps people calculate the correct amount of tax to withhold throughout the year based on their complete set of tax facts and circumstances. Alternatively, taxpayers can use the worksheet include with estimated tax form 1040 ES. There's a link to that here or read through publication 505 tax withholding an estimated tax available in irs.gov. Both are excellent resources, they say. Excellent. Anyway, planning ahead. It's never too early to get ready for tax filing season. More tips and resources. Check out the get ready page. There's a link to that here. Get ready to pay pay page is what they should call it. Get ready to pay page. Whatever, but they don't say paid. They just say get ready. So get ready page. It's on irs.gov. There's a link to that page. There's a link to all this other stuff I said there was a link to. There'll be a link to this in the description.