Ten Reasons You Should Pay Taxes Quarterly
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Paying taxes once a year in April seems like the standard, but for millions of Americans, that once-a-year approach isn’t just wrong, it’s risky. The IRS requires you to pay estimated quarterly taxes if taxes are not automatically deducted from your income. If you fail to make quarterly payments, you may face penalties, interest fees, or even a large surprise at tax time. These payments are necessary to avoid financial penalties and stay in good standing with IRS. Here are ten times when quarterly payments are necessary or make sense. If You Are Self-Employed Or A Freelancer
If your self-employment is part-time or full-time, you are both an employee and employer. You are responsible for both income taxes and self-employment taxes. This includes Social Security and Medicare. You’re required to pay quarterly estimated taxes since no taxes are deducted from your earnings. What is the general rule? Quarterly payments may be required if you anticipate owing at least $1,000 for taxes in the coming year. When You Have a Profitable Side Hustle
Selling products on Etsy, driving for Uber, offering tutoring services–whatever the gig, income from side hustles is taxable. Most people believe that they are covered if they work full-time and taxes are already withheld. If you do not adjust your withholdings and pay quarterly taxes, you may end up paying less than you should. If you have a lot of money, the IRS will expect to receive a share every quarter. When You Earn Investment Income
Dividends, interest, and capital gains can all contribute to your tax liability. You’ll have to pay quarterly taxes if your investments generate substantial income, but you don’t have taxes deducted, as you would with a brokerage account. This is common among retirees and wealthy individuals who have diversified portfolios which generate non-wage income all year. Rent Income
Rental property can provide a steady cash flow each month, but it is not taxed at the time of receipt. You’ll need to pay quarterly estimated taxes unless you have made arrangements for taxes to be withheld elsewhere. Rental property owners can also deduct costs like mortgage interest or repairs. If you’re unsure how to accurately estimate your taxes after deductions, it’s worth speaking to a tax professional to avoid underpayment.
5. Selling a Large Asset
Sold your house, car or cryptocurrency for a profit? This gain is taxable. The transaction could have occurred early in the calendar year, and it may have pushed up your income more than you expected. This would trigger the need to make a quarterly payment. You may have to pay tax on a gain that you made during a quarter, and not at the end of the year, even if it was merely one. Image source: Unsplash
6. If You Are Retired and Still Receiving Taxable Income
Many retired people live off a combination of Social Security, Pensions, and Investment Withdrawals. Some income sources, such as traditional IRA withdrawals, may be subject to tax withholding. Quarterly payments are the best way to avoid penalties if your retirement income puts you in a position where taxes are due and not enough tax is automatically withheld. When You’re a High-Income Earner Without Withholding
If your primary job doesn’t withhold enough taxes or you earn a lot of income from multiple sources, you could end up owing far more than expected. Even those with high income from investment or bonuses should check their withholdings. They can also consider quarterly payments in order to balance out the situation. Quarterly payments will help you meet the IRS’s expectation that you cover 90% of your tax liability before year-end in order to avoid penalties. If You Own an S-Corp Or LLC
Many owners of small businesses operate as S corporations (S-Corps) or limited liability companies. They often transfer income to the owner, who is then responsible for the estimated tax on the share of profits. Quarterly taxes allow you to manage your tax burden more effectively and in real time, rather than waiting until the last minute and being surprised by a large bill. When You Want to Avoid IRS Penalties
Even if your situation is borderline, paying estimated taxes can offer peace of mind. Underpayment penalties can accumulate over time. It’s best to be conservative if you are unsure if you need to pay quarterly. It’s better to pay a little more and receive a refund, than to pay less and incur interest or penalties. If You Have a Sudden Change in Income
A sudden change in income, such as a bonus, inheritance or freelance project, can drastically alter your tax situation. You may need to make quarterly payments if you receive a windfall in the beginning of the year. Waiting until tax time to settle up could mean cutting a much bigger check than expected, plus potential penalties.
The Bottom Line on Quarterly Taxes
Quarterly tax payments might seem like a hassle, but they’re a proactive step toward responsible financial planning. They help you avoid big surprises, keep you in compliance with the IRS, and give you more control over your money year-round.
Remember, if you’re earning income that isn’t subject to withholding or if your withholdings are insufficient, quarterly tax payments aren’t just a recommendation. They’re a necessity.
Have you ever had to make quarterly tax payments, and if so, was it easier or harder than you expected? What tips would you give others considering the same move?
Read More:
Here’s What You Should Do If You’re Self Employed And Want to Retire
12 Little-Known Financial Perks of Being a Freelancer
