How to avoid income tax penalties and interest.

Many folks find themselves in a financial crisis the first time they file annual income taxes as a self-employed person. Why? Simply because they didn’t plan for or set aside money for taxes, which often results in penalties and interest fees, too. When you work for an employer, taxes are automatically deducted from your paycheck. As a self-employed freelancer, business owner or entrepreneur it’s your responsibility to pay federal and state taxes. Here’s what you need to know.

Quarterly Estimated Tax Payments Are Expected

The IRS and the State of Michigan expect you to make quarterly payments as income is earned. The due dates are the same for both:

• April 15
• June 15
• September 15
• January 15 of the next year

Penalties for not paying or underpaying estimated taxes

Keep in mind, if you overlook or skip quarterly estimated income tax due dates, you could get hit with penalties and interest.

For Federal income taxes, the penalty starts at 5% of the unpaid amount and could go as high as 25%. Interest, based on the federal short-term rate plus three percentage points is assessed every quarter.

However, there is no Federal penalty or interest due if:

• you owe less than $1,000 in tax after withholdings and credits, or
• you paid at least 90% of the tax for the current year, or
• you paid 100% of the tax shown on the return for the prior year.

For Michigan income taxes, you’re required to make quarterly estimated payments if your tax liability will be $500 or more for the year. If you don’t make any estimated payments to the State, the penalty is 25% of the tax due with a minimum of $25 per quarter. If you underpay state estimated taxes, the penalty is 10% of the tax owed with a minimum of $10 per quarter.

If you’re a Michigan resident working remotely from another state, make sure you understand the applicable tax rules for out-of-state remote workers.

If you’re not sure how much to pay in estimated taxes, check out the IRS Withholding Estimator, and online State of Michigan tax resources. Consider speaking with a knowledgeable tax accountant.

Plan ahead for estimated tax payments

To avoid a cash crunch when quarterly estimated tax payments are due, self-employed people should set aside 25% to 30% of their income each time they get paid. Setting up a Consumers business saving account for this purpose can help manage your money so you can pay your taxes on time, in full and without the added expenses of penalties and interest.

Do you have business banking questions? Contact our knowledgeable Commercial Loan Officers online or call 800-991-2221. We’re also available to help in person at your local office.

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