CSLB Law & Business ExamBusiness FinancesMedium
A sole proprietor contractor expects to owe more than $1,000 in federal income tax for the year after subtracting withholding and credits. According to IRS rules, what should the contractor do to avoid an underpayment penalty?
- APay the full amount owed when filing the annual return
- BFile a tax extension request in April
- CMake quarterly estimated tax payments throughout the year
- DIncrease W-2 withholding from an employer job only
Show answer & explanationAnswer & explanation
Correct answer: C. Make quarterly estimated tax payments throughout the year
Self-employed individuals expecting to owe $1,000 or more in tax must make quarterly estimated tax payments (Form 1040-ES) to avoid underpayment penalties, since no employer withholds tax on their behalf.
Why the other options are wrong
- A. Paying only at filing time results in underpayment penalties for the earlier quarters.
- B. An extension only extends time to file, not to pay, and doesn't prevent underpayment penalties.
- D. A sole proprietor typically has no employer W-2 withholding to adjust.
Estimated Quarterly Taxes
Payments self-employed individuals make four times per year to cover income and self-employment tax obligations, avoiding IRS underpayment penalties.
- Required if expected tax owed is $1,000 or more
- Paid via IRS Form 1040-ES
- Due dates roughly mid-April, June, September, and January
Memory trick: No boss withholding? Pay the IRS quarterly yourself.