What to Know About Making Estimated Quarterly Tax Payments
Editor’s Note: If you think filing taxes once per year is miserable, filing them four times each year has to sound like the worst thing ever. However, for many self-employed people, it’s a necessity and reality. Here’s how to get started if filing quarterly taxes are new for you.
As a self-employed small business owner, one of the realities of my financial situation is the requirement to make estimated quarterly tax payments. While it’s never fun to pay taxes, and you might not want to pay four times a year instead of once a year, the reality is that you can ease your cash flow by setting up quarterly estimated taxes. Here’s what you need to know:
Figuring your quarterly tax payments
Do you know how much you owe each quarter? You’ll need to make regular payments on April 15, June 15, September 15 and January 15. Figuring what you owe is fairly straightforward if you take what you owed in taxes last year and divide that number by four. There’s a method of estimating your tax requirement each quarter, but it’s much easier just to base your payments on last year’s tax liability.
If you pay 100% of what you owed last year, you will most likely be protected from penalties that come from underpaying by too much. This is important to realize, since the IRS doesn’t like you hoarding your cash over the year. It’s tempting to keep all the money in a high-yield account, or invest it and earn interest before you pay the government, but that can result in underpayment penalties. If you have self-employed income, paying quarterly is a good way to avoid penalties.
While paying 100% of what I owed last year protects me from underpayment penalties come tax time, I still don’t want to be hit by a big tax bill. In order to accommodate my increasing business income, my husband withholds extra from his regular paycheck in order to ensure that our tax bill remains manageable. You are also welcome to make additional payments to the IRS at any time.
Remember state taxes
Once I got my federal income tax situation squared away with my estimated quarterly tax payments, I ended up unpleasantly surprised with my state tax bill. It’s easy to forget about state taxes, since many states don’t require quarterly estimated tax payments like the federal government does.
In order to ease my cash flow when paying taxes, I break it down by the month. I know that I will need to pay my federal taxes quarterly, and my state taxes annually. I determine my total tax bill (federal and state), based on last year, and divide that by 12. Each month, the requisite amount is transferred into a high-yield savings account. Each quarter, I pay what is owed in federal taxes, and the rest of the money remains in the account, building up and earning interest, until it’s time to pay state taxes.
Payments made easy
Making quarterly payments is easy, thanks to the electronic system offered by the government. Use the EFTPS to make payments, or schedule automatic withdrawals, so you don’t forget. Just make sure you always have enough money in the account to cover what you owe.
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