The Benefits of Estimated Quarterly Taxes

For some companies it's a choice and for other's a necessity. We are going to be discussing the benefits of estimated quarterly taxes, and why it might be one of the best ways to tackle your taxes head-on. 

We have talked about how to prepare for your taxes, where to get help to prepare your taxes, how to save money for your taxes, and the best ways to do so. Now it's up to you to decide how you will file your taxes. Paying once a year vs. quarterly is just as unique as your financial situation and your company. The choice on how to pay for your taxes depends on your preference and financial situation. It's very common to wait until the end of the fiscal year and fill out the tax forms and pay for everything by April 15th. But, for others, this isn't an option or is the worst option for them personally. For this group of people, their best option is to pay estimated quarterly taxes. So, instead of paying in one large chunk, you pay four small chunks throughout the year. It might sound intimidating and more of a hassle than its worth. But you might be surprised to find that it's more beneficial than you think! 

So, who does estimated quarterly taxes benefit? By IRS ruling, you have to file your taxes quarterly if you are expected to owe over $1000 in taxes for the current year or you expect your withholdings and refundable credit to be less than 90% of the tax shown on your current tax return or 100% of the tax shown on last year's return. Sounds a little harsh, right? But for a lot of businesses and even those who are self-employed, there are many benefits to filing taxes this way. Contracted persons or independent contractors and people who receive dividend income or real estate and rental income receive all of their pay upfront and no taxes are taken out of this pay. But that doesn't mean taxes won't be taken out of this pay. These persons are the perfect candidates to pay quarterly taxes instead of paying on a giant lump sum at the end of the year. They can live well off of their earnings, but a lot of the time one giant tax bill is more than this type of lifestyle can afford. If you cut it up into four smaller payments, it is much easier to handle. 

The Pros

• If you choose to pay quarterly, you're going to avoid the shock of owing so much at the end of the year. By the time you've made it through the year living on lump sums that have come sporadically throughout the year, you may not have enough to pay off all of your taxes at one time. Plus, no taxes have been taken out to begin with, so it's going to seem like you owe way more than you should. If you stretch out the payments throughout the year, there won't be any unexpected shock. You will have smaller payments that are easier to handle and easier to prepare for. 
• It's easier to adjust to unforeseen financial changes. 
• You will have more cash on hand throughout the year, not having to save and prepare for a possible large sum owed to the IRS. 
• You'll be able to avoid unpleasant penalties. If you are unable to pay your taxes at the end of the year, the IRS tacks on penalty fees, and you'll end up owing even more than you did when you started the process. 
• You will have a better understanding of your cash flow. You will have to track your spending and earning closer and more often since you'll be paying four times a year. You'll need to understand the ebb and flow of the expense of your company and what you're making far better than you did before. This way you can understand what your expenses are every quarter to then turn around and pay taxes on everything. 
• You might think filing this way will be a lot of paperwork. But you can catch mistakes faster and fix them quickly throughout the year. It's easier to track down and keep receipts too since you'll have to start looking for them and claiming them sooner than waiting a year to do so. 

The Cons

• You have a greater chance of penalties and interest for underpayments. You have to stay on top of your finances and pay exactly what is expected for each quarter. There can't be any guesswork, and you have to save and report everything. 
• It's hard to remember to pay quarterly and cut the check and fill out all the forms on time. 
• It has the chance of not being viewed by the government as paid evenly through the year. 

These lists are heavy. Even though the list of Pros is much longer than that of the Cons, the shorter list might outweigh its component. But however you decide to pay your taxes, or how they are dictated that you must pay, just be very smart in preparing. Stay educated, stay prepared, stay organized, and stay alert. In this case, with so many moving parts, having someone do your taxes for you just might be the best way to go. We are here to help you no matter what. Until next time, prep well! 

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