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The IRS announced on May 20 that it would be raising interest rates beginning July 1, 2022. The interest rate increase would apply to overpayments and underpayments of quarterly taxes. Generally speaking, these changes typically apply to corporations, 1099 independent contractors and self-employed people who have to pay quarterly estimated taxes. Interest rates are calculated quarterly based on the federal short-term rate.
The new tax rates are as follows:
- 5% for overpayments.
- 4% for overpayments for corporations.
- 2.5% for a corporate overpayment greater than $10,000.
- 5% for underpayments.
- 7% for large corporate underpayments.
According to tax law, you must pay a certain percentage of your taxes throughout the year. W-2 employees have this money automatically deducted from their paychecks in the form of payroll taxes. Independent contractors, on the other hand, are responsible for ensuring they pay their fair share of taxes throughout the year.
Sole proprietors, partners in a business, and business owners who file taxes as S-corporations must pay quarterly taxes if they expect to owe at least $1,000 in April when tax returns are due. That amount is $500 for a C-corp.
Many workers can estimate their quarterly taxes using the “safe harbor method.” This can protect you from underpayment penalties. You can opt to pay 100% of your tax liability from the prior year, split into payments in April, June, September, and the following January. If your earnings are fairly consistent from year-to-year, you can choose to pay 90% of your tax liability from the current year.
Alternatively, you can estimate your earnings, deductions, and taxes you’ll owe for each quarter and pay that amount. That means you could owe more in taxes during busier times. But if you underestimate your total liability at the end of the year, you may owe penalties of up to 5% under the new interest rate increase.
If you aren’t sure how much you should pay, it’s a good idea to consult with a tax accountant who specializes in working with small businesses and 1099 contractors.
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