The Internal Revenue Service wants you to pay as you earn. It provides tax vouchers for estimated quarterly payments for self-employed individuals. If you are an employee, your employer withholds part of your income for taxes based on your Form W-4 filing. You may qualify to pay all federal taxes at the end of the year, based on last year’s taxes and this year’s expectations. The IRS requires honesty in completion of tax forms. If you have to lie to keep from withholding or paying taxes during the year, it is illegal.
If you are self-employed and you expect your tax liability to be less than $1,000, you may wait until the end of the year to file your tax return and pay your taxes. If you owe quarterly taxes, the IRS expects you to pay estimated taxes each quarter and imposes penalties on unpaid amounts. These penalties were 4 percent during 2010 and 3 percent for 2011.
If your income is low enough that you will not have to pay taxes, you may be exempt from withholding. Complete the Form W-4 reporting that you qualify to be exempt from withholding, and your employer will honor it. You can only qualify for an exemption if the IRS returned all of your tax withheld for last year and you anticipate a full refund of this year’s taxes. You must file a new W-4 each year for the exemption to apply. An exemption from withholding does not apply to Social Security and Medicare taxes, and your employer will continue to withhold these amounts. In 2011, the employee’s share of Social Security tax is 4.2 percent and the Medicare tax is 1.45 percent. Your employer may withhold tax for fringe benefits, such as use of a company truck as well.
The IRS may request a copy of your W-4 from your employer. A “lock-in letter” may result, issued by the IRS to state the number of exemptions you can claim. You can contest the lock-in letter, but penalties apply for supplying false information. If you make statements or claim more allowances than you can justify, the IRS imposes a $500 penalty. There is a criminal penalty for willful failure to supply information that would increase the withholding on the Form W-4. This penalty requires conviction and is a $1,000 fine or a year in prison or both.
Forms W-2 and 1099-MISC
If you are an employee, you receive Form W-2 at the end of the calendar year. This form sends the information to the IRS as well, giving you credit for income earned and taxes withheld. Social Security updates your account with the income data to add to your retirement and Medicare work history. If no taxes have been withheld and you owe taxes, you may owe penalties in addition to the tax. Independent contractors and self-employed workers receive Form 1099-MISC reflecting the income earned for contract work. The business does not withhold taxes from the independent contractor; taxes are the contractor's responsibility.
- IRS: Tax Withholding and Estimated Tax
- IRS: (Circular E) Employer's Tax Guide
- IRS: 2011 Form 1040-ES -- Estimated Tax for Individuals
- IRS: Information About Your Notice, Penalty and Interest
- IRS. "(Circular E), Employer's Tax Guide." Page 21. Accessed June 13, 2020.
- Social Security Administration. "What Is FICA?" Accessed June 13, 2020.
- IRS. "FAQs on the 2020 Form W-4." Accessed June 13, 2020.
Linda Richard has been a legal writer and antiques appraiser for more than 25 years, and has been writing online for more than 12 years. Richard holds a bachelor's degree in English and business administration. She has operated a small business for more than 20 years. She and her husband enjoy remodeling old houses and are currently working on a 1970s home.