The IRS has reminded taxpayers that the new Tax Withholding Estimator tool includes a feature designed to make it simpler for employees who received self-employment income to accurately estimate the right amount of income tax. The estimator tool is featured on the IRS webpage.
The Tax Withholding Estimator is an expanded, mobile-friendly online tool that provides self-employed individuals, workers, retirees, and other taxpayers with a more dynamic and user-friendly way to calculate the amount of income tax they want withheld from either wages or pension payments. The IRS encourages taxpayers to use the tool for a “Paycheck Checkup,” to make sure they are having the right amount of tax withheld and avoid a “surprise” during tax filing season. This is especially important for anyone who faced an unexpected tax bill or a penalty when they filed earlier this year.
The tool allows a user to enter any self-employment income, including income from side gigs or the sharing economy, in addition to wages or pensions. The user will be alerted if they qualify for several special tax benefits, including the self-employment health insurance deduction or the deduction for contributions to a Simplified Employee Pension (SEP), Savings Incentive Match Plans for Employees (SIMPLE), or other qualified retirement plan. The tool will automatically calculate the self-employment tax and the self-employment tax deduction and incorporates these into its overall tax liability estimate. It will then automatically link to the appropriate withholding form, which the individual can then fill out and submit to the employer (Form W-4) or the pension payor (Form W-4P).