If you work a regular job and have ordinary income, you already know you have taxes taken out regularly. But what about other types of income? If you freelance, for example, no taxes will be taken out of your paychecks—but that doesn’t mean your tax liability is zero.
Paying taxes is something no one likes doing, but it is a necessity in life, and there are certain people and certain situations where making quarterly tax payments is a must. After all, Uncle Sam has laws in place for taxable events that make not paying a crime, and this is not something you’ll want to deal with because it is extremely stressful.
People Who Need to Make Quarterly Tax Payments
Paying your taxes is necessary, and this includes not just your federal tax amount but state and local taxes as well. In fact, those who live in the United States must pay taxes on most types of income.
If you work and your employer isn’t withholding taxes from your paycheck, you’ll have to make quarterly payments to avoid owing penalties for underpayment of taxes when you file your return for the year. Some of the people who may need to pay quarterly taxes include those who:
Freelance
Receive significant money from their retirement account
Receive income from alimony
Receive significant money from any type of investments
Receive income distributions from a Subchapter S corporation or a partnership
Have received a large income windfall—e.g., from selling assets of any type
As you can see, it isn’t just freelancers or those earning investment income who must pay estimated taxes. It is anyone and everyone receiving taxable income from any source that doesn’t automatically withhold taxes.
What if you receive income from a traditional W-2 job or sources such as a pension and already withhold taxes? It may make sense to increase your withholding through these sources rather than deal with the hassle of paying estimated taxes. Talk to your financial advisor or tax professional to determine the best course for you.
When Should You Pay These Taxes?
Whatever you don’t have withheld from your paychecks or other sources during the year will be owed when you file your tax return the following year. Taking care of the anticipated underpayment through estimates should make filing a bit less stressful. It can also make it cheaper because it will eliminate underpayment penalties.
The IRS has already determined when you should make these quarterly payments, and the schedule is as follows:
April 15 for January through March
June 15 for April and May
September 15 for June through August
January 15 (following year) for September through December
Naturally, you won’t always know exactly what you’re going to earn in any given tax year, and the IRS realizes this. For this reason, your best bet is to use the IRS estimated tax worksheet or work with a tax professional. The required amount to pay varies with each individual, so it is important to tailor your payments to your specific situation.
Keep track of what you pay throughout the year, and you will either owe more at filing or receive a refund, just like any other source of withholding.
If You’re Still Confused
What if you’re confused about paying quarterly tax payments or you’re concerned about how it will affect your income in the short term or even the long term? You might consider speaking with a professional specializing in tax planning or retirement planning to better learn how to reach your personal financial goals. Our Bethesda, MD financial planning firm integrates tax strategies into our clients’ comprehensive financial plans.
The point of these quarterly payments isn’t to make your life more complicated; instead, they are to make sure you don’t receive a huge tax bill every April 15th. It’s simply easier on you financially to pay taxes spread out four times a year than it is to pay them in one lump sum in the spring.
Also, check out this flow chart. Answering the questions could help you understand whether you need to make quarterly payments.
How This Affects You Financially
Financially, quarterly tax payments make your life a little easier, and the payments are required regardless of your tax bracket. Also, you’ll need to keep in mind that the laws apply to all income you earn each year, even if you earn money from freelancing and from some type of investment in the same year. Again, a good tax specialist can answer any specific questions about quarterly tax payments, which is even more critical if you’re retired and living off retirement income or investments.
Regardless of your situation, these specialists can help you learn ways to reduce your tax burden legally, including methods such as tax-loss harvesting and utilizing tax-advantaged accounts. The IRS will always get what you owe them, but they only expect you to pay your fair share and nothing else. Whether you think it’s a fair system or not, it’s always better to be honest and upfront about what you owe to avoid expensive penalties and fines.
Talk to a fee-only financial advisor to determine how comprehensive financial planning, including tax planning, can help you reach your goals.
Don’t take anything we say as Tax or Legal Advice. We are not licensed as CPAs, tax preparers, or attorneys.
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