Paying taxes once a year in April seems to be the standard, but for millions of Americans, the annual approach is not only wrong, but risky. If your income does not automatically deduct taxes, the IRS expects you to pay in the form of estimated quarterly taxes throughout the year. And, if you don’t, you could face big surprises in fines, interest fees, or tax seasons.
From freelancers and landlords to retirees and helping scammers, there are more people than ever when quarterly payments are not optional. This is essential to maintain good credibility with the IRS and avoid huge financial consequences. Let’s explore ten specific times when quarterly payments make sense or need them at all.
1. When you are self-employed or freelancer
If you are self-employed, or even part-time, the IRS will consider you as both an employee and an employer. This means you are not only responsible for income tax, but also for self-employment taxes including social security and health insurance. Since your income does not deduct any taxes, you expect you to pay your estimated taxes quarterly. General rules? If you expect to owe at least $1,000 in taxes during the year, you may need quarterly payments.
2. When you have profitable aspects
Sell products on Etsy, drive for Uber, provide coaching services – regardless of the show, the income from the hustle and bustle from the side is taxable. Many people believe that if they already have full-time jobs that have been retained, they will be guaranteed. However, if your busyness brings extra profits and you don’t adjust withholding or pay quarterly taxes, you may end up underpaying. The IRS doesn’t care that it’s “just extra money.” If those numbers add up, they’ll expect quarterly share.
3. When you earn investment income
Dividends, interest and capital gains can all contribute to your tax liability. If your investment is generating substantial income and you are not withholding taxes, for example from a traditional brokerage account, you will estimate and pay taxes quarterly. This is especially common for retirees or wealthier people, with diverse portfolios generating non-wage income throughout the year.
4. When you charge rental income
Rental properties can generate stable monthly cash flows, but income is not taxed. Unless you have arranged for tax deductions elsewhere, you may be required to pay estimated taxes quarterly. In addition, the owner of the leased property usually deducts fees such as repair or mortgage interest. If you are not sure how to estimate your taxes accurately after deductions, it is worth talking to a tax professional to avoid payments.
5. When you sell a big asset
Sell your home, your car, or even your cryptocurrency to make a profit? This income is considered taxable income. If the transaction occurs early this year and raises your revenue to the expected heights, it may trigger the demand for quarterly payments. Even if you only participate in one large financial event, you may need to report and pay taxes within the quarter, not just the end of the year.
6. When you retire but still receive taxable income
Many retirees live in social security, pensions and investment withdrawals. While some sources of income may deduct taxes, others (such as traditional IRA withdrawals) may not. If your retirement income gets you into a tax position without automatic withholding, quarterly payments may be your best option to avoid fines.
7. When you are a high-income earner without having to withhold
If your main job is not deducting enough taxes, or you are earning a lot of income from multiple sources, you may end up in arrears far more than you expect. Even salaried employees with high investment or bonus income should be carefully examined and quarterly payments are considered to balance issues. The IRS wants you to assume at least 90% of your tax liability at the end of the year to avoid fines, and quarterly payments can help you maintain your goals.
8. When you have an S-Corp or LLC
Many small business owners operate as S companies or limited liability companies (LLCS). These entities usually pass on income to the owner’s personal returns, leaving the owner responsible for the estimated tax on their share of profits. Quarterly taxes help manage this burden in real time, rather than facing huge tax bills when filing.
These types of entities also often deal with complex deductions and write-offs, further enhancing the need to keep things organized and pay up to date.
9.When you want to avoid IRS penalties
Even if your situation is on the edge, paying estimated taxes can be reassuring. The IRS imposes fines on debts that may aggravate over time. If you are not sure if you need to pay quarterly quarters, then a conservative approach is usually the safest. Better than paying less and fines or facing interest or fines, pay slightly more and get a refund.
10. When you experience sudden income changes
Surprising bonuses, inheritance or sudden freelancing programs can quickly change your tax situation. If you experience surprises early this year, the additional income may require you to start quarterly payments even if you didn’t need them before. Waiting until the tax time settles may mean reducing checks that are much larger than expected, plus potential penalties.
The bottom line of quarterly tax
Quarterly taxes may seem like a hassle, but they are a positive step towards a responsible financial plan. They can help you avoid big surprises, make you compliant with the IRS and provide you with more funding control throughout the year.
Remember that quarterly taxes are more than just advice if your income is not withheld or under withheld. This is necessary.
Have you ever had to do quarterly taxes, and if so, it’s easier or harder than you expected? Considering the same move, what tips would you give to others?
Read more:
If you are self-employed and want to retire, this is what you should do
12 little-known financial privileges
