For many people, the tax deadline comes once a year.
Everyone knows that individual tax returns need to be filed by the middle of April.
If you owe money to the government (federal and state), you need to make those payments by the tax filing deadline.
What many taxpayers don’t realize, though, is that they are actually paying taxes quarterly.
Their employers deduct taxes from their paychecks on a monthly basis. Quarterly, those employers then pay taxes. It’s unnoticeable to most people who have traditional jobs because the money is deducted automatically.
Those of us who are self-employed, or own own businesses, are very aware that estimated tax payments need to be made quarterly.
Paying Quarterly Estimated Taxes
Starting your own business can have tax benefits. However, you do need to keep on top of your quarterly payments. First of all, if you owe more than the IRS thinks you should at the end of the year, you will be assessed a penalty. This penalty can be fairly harsh in some cases. This means that you shouldn’t just hoard your money in a high yield savings account all year and then write a big check to the IRS at tax time.
Instead, you are expected to make quarterly payments, estimated based on what you earned the previous year. The easiest way to estimate your quarterly taxes is to take the total amount you owed the previous year, and divide it by four. So, if your total tax bill (before you account for estimated payments you made to the government) was $10,000, you will need to pay $2,500 each quarter. As long as you pay 100% of what you owed the previous year, you are largely protected from penalties later on.
There is a more complex method of figuring out what you owe by looking at your income tax, AGI, and your self-employment tax rate, then multiplying that by your quarterly profit every three months. I find it’s easier just to base my quarterly payments on what I owed the previous year.
Planning to Pay Quarterly Estimated Taxes
Planning ahead can make the payment of your quarterly estimated taxes a little easier. I like to divide what I owe by 12. Then, each month I place that amount in a high yield savings account. When quarterly taxes are due (April 15, June 15, September 15, and January 15), I transfer the amount I owe out of the account and into a checking account. This allows me to earn some interest, while still making sure that I have what I need to pay my quarterly taxes.
If you are late paying taxes, realize that you will have to pay interest. The IRS charges interest immediately, based on the postmark on your payment.
And, don’t forget about your state taxes. Some states don’t require quarterly payments, so it’s easy to forget about it — until you are overwhelmed by the tax bill later. This happened to me once. It isn’t pleasant. Even if your state doesn’t require quarterly payments, estimate what you would owe, and then set money aside each month, or each quarter, so that you are prepared come April.