How Quarterly Tax Payments Can Help You Lower Your Tax Bill and Avoid Penalties

As a taxpayer, you may be aware that when you don’t pay enough taxes throughout the year, you could face a large tax bill when filing your return. This is where quarterly tax payments come in. These payments allow you to pay your estimated taxes in four installments throughout the year every quarter. Not only does this help you avoid underpayment penalties, but it can also reduce your overall liability when you file your tax return. Here’s how it works and why you should consider it.

What Are Quarterly Tax Payments?

Quarterly tax payments, or estimated tax payments, are payments made to the IRS, or your state’s revenue department if you live in a state with income tax, on income that isn’t subject to automatic withholding. Taxpayers that these mostly affect are those who are self-employed, own rental properties or investments, or have side gigs. The goal is to spread out your tax liability, so you’re not hit with a large bill when tax season arrives. This doesn’t affect employees who only have a W-2, because their taxes are paid out through payroll as frequently as every pay period to every quarter.

Why Make Quarterly Tax Payments?

Making these payments throughout the year is essential for several reasons:

1. Avoid Penalties and Interest

   
   

   The IRS requires that you pay taxes as you earn income. If you wait until tax season, you may face penalties for underpayment, in addition to the interest that accrues on those unpaid taxes. By making quarterly payments, you ensure that you’re staying on top of your tax obligations.

   
   

2. Manage Your Cash Flow

   
   

   Paying your taxes in installments rather than a lump sum can make it easier to manage your business or personal finances. Quarterly payments are typically calculated as a percentage of your expected income for the year, so you can budget accordingly and avoid any surprises at year-end.

   
   

3. Lower Your Year-End Liability

   
   

   By proactively paying taxes on your income throughout the year, you’re essentially prepaying your tax bill. This helps lower the amount you owe when you file your return, reducing your chances of being hit with a substantial balance due.

How to Calculate Your Quarterly Tax Payments

To calculate your estimated tax payments, follow these simple steps:

1. Estimate Your Total Income for the Year

   
   

   Start by estimating how much income you expect to earn for the year, including self-employment income, dividends, and other taxable sources. For those who run their own business, it is essential to make sure your books are up to date to make sure that your calculation is accurate.

   
   

2. Calculate Your Tax Liability

   
   

   Apply the appropriate tax rates to your estimated income. If you are a business owner, at a minimum 15.3% of your income from your business is self-employment tax. On top of that, you will have to calculate Federal and State Income tax If you’re unsure about tax rates, you can use IRS Form 1040 instructions, which includes worksheets to help calculate your Federal liability. Depending on your state, you may have to look for the instruction equivalent for your state.

   
   

3. Divide Your Tax Liability

   
   

   Once you know your total estimated taxes for the year, divide this amount by four to determine how much to pay each quarter. Payments are due on April 15, June 15, September 15, and January 15 of the following year for individuals.

   
   

4. How to Pay Your Liability

   
   

   There are multiple ways to set up quarterly payments. They can be done online through the IRS website and your state department of finance by creating an account for yourself and making the payments through the online portal. If you have your prior year tax return prepared by a professional, you could ask them to either efile estimates for you for the next year or print out estimate vouchers for you. Be aware that you will need to keep track of if you have enough money in your account when the payment is due if you have the professional efile. If you have estimate vouchers printed, you must mail the estimates in with either a check or money order.

What Happens If You Don’t Make Quarterly Payments?

If you don’t pay enough taxes throughout the year, you could face a hefty tax bill, penalties, and interest charges. The IRS may also require you to pay estimated taxes for the following year in advance, which can create financial stress.

Conclusion

Quarterly tax payments are a simple yet effective way to reduce your tax liability and avoid penalties. By planning ahead and making consistent payments, you can manage your finances more effectively, stay compliant with tax laws, and ensure that tax time is less stressful. Be proactive, calculate your estimated taxes, or ensure you have a professional who will keep you up-to-date, and remember to pay on time. It’s a smart strategy for keeping your financial house in order and ensuring you are not stressed out by the IRS or your state finance department.

At Pathfinder, we’re able to help you navigate the tax complexities as well as bookkeeping to make estimates a breeze. See our tax planning and bookkeeping services for more information.