How does the pay-as-you-go procedure apply to wage earners? To persons who have income from sources other than wages
The Correct Answer and Explanation is :
Correct Answer:
The Pay-As-You-Go (PAYG) procedure applies to wage earners through income tax withholding, where employers deduct estimated taxes from employees’ paychecks and remit them directly to the IRS. For individuals with income from sources other than wages, such as self-employed persons, freelancers, or investors, the PAYG system requires them to make quarterly estimated tax payments to cover their tax liability.
Explanation (300 words):
The Pay-As-You-Go (PAYG) tax system ensures that taxpayers remit taxes on their income throughout the year rather than in a lump sum at the end of the tax year. This system helps prevent financial strain on both taxpayers and the government by ensuring a steady revenue flow.
For wage earners, the PAYG process works through income tax withholding. Employers deduct federal (and sometimes state) taxes from employees’ paychecks based on the information provided in their Form W-4. These withholdings cover income taxes, Social Security, and Medicare taxes. Employers submit the withheld taxes directly to the IRS on behalf of the employee, ensuring compliance and preventing tax underpayment penalties.
For individuals with income from sources other than wages, such as self-employed workers, independent contractors, and those earning rental or investment income, the PAYG system requires them to make quarterly estimated tax payments. The IRS mandates these payments if a taxpayer expects to owe at least $1,000 in taxes after withholdings and credits. The estimated payments are typically made in four installments (April 15, June 15, September 15, and January 15 of the following year).
Failure to comply with the PAYG system, either through insufficient withholdings or missed estimated tax payments, may result in penalties and interest charges. To avoid this, individuals should use IRS Form 1040-ES to calculate and submit their estimated taxes. The PAYG system ultimately promotes financial discipline and ensures that taxpayers contribute to government revenue as they earn income.
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Here is an educational infographic illustrating the Pay-As-You-Go (PAYG) tax system. It visually explains how wage earners have taxes withheld by their employer and how self-employed individuals make quarterly estimated tax payments. Let me know if you need any modifications or additional details!