Filing your tax returns and paying them is always an aggravating exercise, so the suggestion that you quadruple the number of times you do it each year might seem…well, a little insane, at first glance. But there are real benefits to paying quarterly estimated taxes that can help you and your business.
Put simply, paying quarterly estimated taxes means that you file and pay every 3 months. It applies only to self-employed individuals or contractors—people who aren’t getting taxes taken out of a paycheck every 2 weeks. The first payment of the year takes place with everyone else on April 15. Then you pay again on June 15 and September 15. You wrap up the calendar year with a fourth-quarter payment on the following January 15.
You might be skeptical. After all, if you hold the money all year, it can accrue interest. Why shouldn’t your earnings do that for you and not for the Internal Revenue Service (IRS)? It’s a fair question and there are 2 good answers.
Paying quarterly ensures that you’ll avoid sticker shock in April. One of the downsides to having a good business year is that you’ll get popped for it at tax time and your financial structure might not be positioned to absorb a larger-than-expected annual tax bill. If you end up having to pay late, the interest charges on your past-due balance will more than wipe out any accrual gains you might have made during the year.
The second reason is even more basic—you might not have a choice. If you expect your tax bill to exceed $1,000 and at least 90 percent of your income has not been subject to withholding, you are required to file estimated quarterly taxes.
The IRS will try to make the quarterly payments easier to calculate by sending you 4 payment vouchers based on your previous year’s earning. For example, if you owed $4,000 in taxes the previous April, you’ll get 4 vouchers for $1,000 each with the due dates referenced above listed. Keep in mind though, that this is based strictly on what you made the previous year and will not account for any changes in your business income.
You also may be a seasonal business. Let’s say you run a tour company in Boston. It’s safe to say you aren’t doing much business in January and that your income is likely jam-packed in the summer months, with a little bit in the spring and fall. Filing your income by quarter makes it easier to manage and you don’t need to worry about saving up for your fourth-quarter tax bill in the heart of the summer rush.
Paying quarterly estimated taxes is as basic as calculating the amount of business income you made in a year and paying your self-employment tax. The quarterly process makes it more structured and manageable.