Quarterly Tax Payments/Estimated Taxes
For many individuals and businesses, tax planning is a year-round affair. Quarterly tax payments, also known as estimated tax payments, play a crucial role in this process, ensuring that you meet your tax obligations without any last-minute surprises. Let's explore what quarterly tax payments entail, who needs to make them, and why they are a cornerstone of effective tax management.
It is probably no surprise that when you make money, the IRS wants their money now, not later. For most people, working for a company, this is something that you don’t have to think about. You simply fill out your form W4 when you get hired and your employer withholds taxes from each paycheck. In this way, you are essentially paying taxes as you earn your income and it all works out come year-end. However, many people don’t fall into this traditional role which in general means you should at least be thinking about making quarterly tax payments.
The withholding system aims to ensure a smooth process where taxes are paid to the IRS as income is earned, keeping both parties satisfied. However, certain circumstances can lead to IRS scrutiny. According to IRS regulations, taxpayers must withhold 100% of the previous year's taxes or 90% of the current year's taxes to avoid penalties. Moreover, self-employed individuals or business owners expecting to owe $1,000 or more when the return is filed are required to make estimated tax payments. If you don’t meet one of these requirements you will be penalized by the IRS.
Below we have some details on quarterly tax payments and how to ensure that you are in compliance with the tax code.
Understanding Quarterly Tax Payments
Quarterly tax payments are periodic payments made to the IRS and, in some cases, state tax authorities four times a year. These payments cover income taxes, self-employment taxes, and any other taxes not covered by withholding.
Who Should Make Quarterly Tax Payments?
If you fall into any of the following categories we highly suggest you work with a tax advisor to calculate and estimate your quarterly tax liability:
Self-Employed Individuals
Freelancers and Contractors
Sole Proprietors
Individuals with Additional Income Sources (side hustles)
Corporations and S Corporations
Employees Receiving Large Bonuses
Quarterly Tax Payment Deadlines
To stay compliant, ensure your payments are submitted by the following deadlines:
April 15: Payment for income earned from January 1 to March 31.
June 15: Payment for income earned from April 1 to May 31.
September 15: Payment for income earned from June 1 to August 31.
January 15: of the following year: Payment for income earned from September 1 to December 31 of the previous year.
Why Quarterly Tax Payments Matter
Making quarterly tax payments is crucial for several reasons:
Penalty Avoidance: Missing quarterly payments can lead to penalties and interest on the amount owed.
Cash Flow Management: Regular payments help you manage your cash flow and avoid a large tax bill at year-end.
Underpayment Prevention: Quarterly payments ensure you're paying enough tax throughout the year to avoid underpayment penalties.
Mastering quarterly tax payments is essential for individuals and businesses alike to meet their tax obligations and avoid penalties. If you're uncertain about your quarterly payment requirements, we invite you to consult with us for personalized guidance tailored to your tax situation.