Everyone’s accustomed to paying taxes, even if many of us may only think about them once a year. But did you know that under certain circumstances, you could be required by the Internal Revenue Service (IRS) to pay estimated taxes throughout the year? Collected once a quarter, these quarterly taxes keep certain taxpayers on top of their yearly tax obligations. Learn more about the difference between annual taxes and quarterly taxes, as well as the impact they may have on your tax returns later.
What Are Annual Taxes?
Annual taxes are determined by the IRS based on your household income. Your tax obligation is then adjusted based on relevant deductions, credits and exemptions you’ve qualified for during the previous year. Typically, those who earn a salary or wages have a portion of their paycheck taken out each month and used to pre-pay their tax obligation regularly throughout the year. Once a tax return is filed during tax season, that person pays the final amount owed to the IRS or receives a refund if they’ve overpaid throughout the year.
What Are Quarterly Taxes?
If you do not have a portion of your paycheck automatically deducted to pay down your tax obligation throughout the year (called withholdings), you may be required to pay estimated taxes quarterly. Alternatively, you may have a portion of your paycheck or pension withheld for taxes, but it is still not enough to cover your tax obligations. Estimated tax is used instead of or in addition to annual taxes in order to pay your income tax, as well as other taxes such as self-employment tax and alternative minimum tax.1
When Are Quarterly Taxes Typically Required?
As mentioned above, estimated taxes may be required if the IRS has determined the withholdings from your paycheck or pension are not enough. In addition, you may be required to pay estimated taxes if you’ve received additional income such as:
- Self-employment income
- Capital gains
Who Pays Quarterly Taxes?
Individuals who are expected to owe $1,000 or more when their return is filed are typically required to pay estimated taxes quarterly. This tends to be business owners and self-employed entrepreneurs, including sole proprietors, partners and S corporation shareholders, according to the IRS.1
Just as they sound, quarterly taxes are due at the end of each quarter - April, June, September and January of the following year. While you must pay a pre-determined amount by the end of each quarter, you can make payments weekly, monthly or however often is needed to pay down the amount.
How Do I Know if I’m Required to Pay Quarterly or Annual Taxes?
If you currently receive a paycheck, you can ask your employer to withhold more money if you want to avoid having to pay quarterly taxes. The IRS offers their own Tax Withholding Estimator, which they recommend using at the beginning of the year, especially if you’ve recently experienced a major life event - marriage, birth of a child, bought a home, etc.2 This tool allows individuals and couples to determine how much they could be required to owe when filing their tax return.
According to the IRS, you are not required to pay quarterly taxes if you meet all three of the following criteria:
- There was no tax liability for the previous year
- You’ve been a U.S. citizen or resident for the entire year
- Your previous tax year covered an entire 12-month period1
How you pay your taxes throughout the year can impact your tax return come filing season. And in certain circumstances, paying estimated taxes quarterly can even prevent you from being hit with a penalty from the IRS. Work with your trusted tax professional to be sure you’re withholding the ideal amount from your paychecks, reducing your tax obligations in a productive way and avoiding potential penalties or big bills during tax season.
Rebecca Kennedy, CFP® is a co-founder of IMPACTfolio® , a wealth management firm that specializes in IMPACT investing and holistic financial planning for one flat-fee.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.