We’re now in the last quarter of 2024, and taxpayers with multiple income streams, particularly gig economy workers and high-income earners, should take a moment to review their tax withholding.
While the September 16th deadline for third-quarter estimated tax payments has passed, there’s still time to make adjustments before the year ends. Doing so can help you avoid an unexpected tax bill or penalties next spring.
Who should be paying close attention?
Certain taxpayers are especially at risk of underpaying taxes, and year-end is the right time to correct course.
Gig economy workers and side hustlers
Workers in the gig economy, such as freelancers, independent contractors, and those with side hustles, often receive income that isn’t subject to withholding. Since taxes aren’t automatically withheld, these taxpayers must make quarterly estimated tax payments to cover their income and self-employment tax liabilities.
Failing to pay enough during the year could result in a substantial tax bill, penalties, and interest when filing a return. Even if you missed the estimated tax payment deadline for the third quarter, there’s still time to make a payment before the end of the year to reduce penalties and interest.
High-income earners with investments or side income
High-income individuals with investment income, rental properties, or dividends may also have insufficient tax withholding throughout the year. If you’ve received significant income from these sources without adjusting your withholding, you could face a surprise tax bill. Individuals in this group should meet with their CPA before year-end to assess their total 2024 income and determine if an additional estimated payment is necessary to cover potential shortfalls.
The risks of ignoring withholding adjustments
Ignoring your withholding can have serious financial consequences. The IRS requires taxpayers to pay taxes as income is earned throughout the year. Failure to do so could lead to underpayment penalties in addition to the taxes owed.
While the IRS offers safe harbor rules that can protect you from penalties if you pay at least 90% of your current year’s tax liability or 100% of last year’s tax liability (110% for those married filing jointly with AGI over $150,000), falling short of these thresholds could lead to penalties.
The IRS calculates penalties based on how much you underpaid and how long the amount has been outstanding. Even if you can’t pay your full tax bill by year-end, making a partial payment can reduce potential penalties and interest charges.
Actions to take now
The first step is to calculate your total annual income, including wages, bonuses, investment income, and any gig economy earnings. You’ll want to project your tax liability based on this income and compare it to the amount you’ve already paid through withholding or estimated payments. If there’s a shortfall, you’ll need to make an additional payment before year-end. You can do this through the IRS’s online payment system, where you can specify that the payment is for the 2024 tax year.
If you expect to continue earning additional income that isn’t subject to withholding, you may want to adjust your W-4 form with your employer to increase withholding. This can ensure that taxes are covered for future income. Additionally, any bonuses or other year-end compensation can create a tax burden, so updating your withholding now may prevent a larger tax bill next spring.
Meeting with your CPA: a smart year-end strategy
If you haven’t consulted with your CPA this year, now is the perfect time. A year-end meeting can help you evaluate your current withholding or estimated payments and determine if adjustments are needed. For gig workers and high-income earners alike, this consultation can make the difference between a smooth tax filing season and one filled with unexpected expenses.
If you’d like personalized advice on how much to pay before the end of the year based on your expected 2024 income, please contact our office.