FILING TAXES QUARTERLY OR ONCE A YEAR-HOW TO DETERMINE WHICH ONE IS BEST
“To file quarterly, or not to file quarterly, that is the question.” It can be mentally exhausting trying to figure out all the loopholes of filing taxes. ESPECIALLY, when you don’t know the rules. But don’t panic! Take a deep breath, it will be okay.
In order to figure out if you need to file quarterly taxes, let’s first understand the difference between yearly and quarterly taxes.
WHAT’S THE DIFFERENCE BETWEEN YEARLY AND QUARTERLY TAXES?
Well, when you’re hired by a company, you fill out paperwork including a W-4. That W-4 let’s your employer know how much taxes to withhold from each paycheck. At the end of the year, you receive a W-2 which shows the amount of taxes held for that year including Federal Taxes (Social Security and Medicare) and State and Local Taxes. This is what you need to file your yearly taxes, among other things, to help balance out the tax scale.
However, anyone who is self-employed such as a freelancer, independent contractor or small business owner doesn’t have any taxes withheld during the course of the year. Therefore, they are not paying into any Federal, State and Local Taxes.
Now, one could only hope that as an independent contractor and/or small business owner, business is booming and the money is rolling in. But with more money comes greater responsibilities! The chances of you having to owe the government more than $1,000.00 in taxes greatly increases.
This is where quarterly taxes come in.
Quarterly taxes, or estimated taxes, is the payment of taxes based upon a filer’s reported earned income for a certain period. Quarterly taxes are broken down into four payments as follows:
April 15th — taxes due on earnings from January 1 - March 31;
June 15th — taxes due on earnings from April 1 - May 31;
September 15th — taxes due on earnings from June 1 - August 31;
January 15th — taxes due on earnings from September 1 -December 31.
You would estimate the taxes you would owe in that time period and make a payment before the due date.
CAN YOU WAIT UNTIL THE END OF YEAR
TO PAY A LUMP SUM?
Unfortunately, no. The IRS is not ok with the idea of you paying your estimated taxes in one lump sum at the end of year.
If you know that you are going to owe more than $1,000 in taxes, the IRS wants those taxes paid during the year. Trying to wait until the end of the year to pay taxes, can lead to other financial issues. Especially, if you fail to reserve enough funds to satisfy your tax debt.
Keep in mind missing any quarterly payments will incur additional penalties and interest. It’s very important to stay on schedule so you don’t end up paying more than necessary!
If you are not sure where you fall in the grand scheme of taxes, don’t go it alone! Reach out and get help from a professional.