If you will owe more than $1,000 in federal taxes, the IRS expects quarterly tax payments. This typically affects people who are self-employed, gig workers, or contractors, since taxpayers with W-2 wages have taxes withheld from each paycheck.
Self-employed or not, there are a few clues that can let you know you’ll likely owe taxes this year:
You owed taxes last year.
If you didn’t change your withholding amounts this year, you’ll likely owe again. Your goal should be to withhold roughly what you’ll owe to the IRS, so you don’t owe and also don’t have a large refund. (For more on why to avoid a large refund, see Make Your Tax Refund Work For You).
Your income changed.
A new job, pulling mandatory retirement distributions, getting an inheritance, or picking up extra contract work might result in changes to your tax situation that leave you with a bill. It’s important to know your tax bracket and adjust your tax strategy accordingly.
This is especially important for a self-employed business owner. You’ll need to keep accurate records of your gross revenue and all business expenses. Your taxes will be calculated based on your net income, so pay close attention to your tax bracket and know your numbers. If you bump up into the next bracket you’ll need to set aside a larger amount than you’re used to.
Tree City Tax Service is piloting a bookkeeping service to support small business owners with their record keeping and tax strategy. If you’re interested, book a consultation here!
You moved or changed jobs.
Living or working in a different city or municipality than last year could also impact your taxes, especially if you work in a non-taxing municipality but live in a taxing municipality. If you don’t correctly set up your withholding through your employer, you can get stuck with a large tax bill from the city where you live!
If you need more info on the local tax side, we dive into planning for state and local taxes in 3 Reasons You Might Owe Taxes (and How to Plan Ahead to Reduce Your Bill).