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should you make quarterly tax payments

Should You Make Quarterly Tax Payments?

November 10, 2015

Estimated tax payments are not only for the self-employed. They are used to pay taxes on any income that is not subject to withholding. If you prefer ‘pay as you go’ over a once-a-year lump sum payment, you can pay taxes four times a year. Employees who have their taxes withheld from their paycheck may use estimated taxes if they have other income sources.

Estimated tax is used to pay income tax, self-employment tax, and other taxes such as excise taxes. You need to calculate these amounts correctly because an underpayment can lead to an IRS penalty, even if a refund is due. U.S. News shares the essentials:

Quarterly Tax Payments: Not Just for the Self-Employed

Self-employed people, such as independent contractors, freelancers, and small business owners, belong to the most obvious category of taxpayers who need to send in quarterly payments. These workers don’t have taxes automatically withheld by an employer so they need to send in their own payments four times a year on the 15th of January, April, June, and September.

However, it isn’t only the self-employed who have to send in these payments. Anyone who could end up owing more than $1,000 in April should be making estimated tax payments throughout the year.

There are a number of scenarios in which taxpayers might need to make estimated payments, even if they have taxes withheld from their paycheck. Estimated payments may need to be sent to cover income from the following sources:

    • Gambling winnings or other prizes
    • Dividends and interest
    • Divorce settlements and alimony
    • IRA distributions
    • Social Security (if your income is high enough to make benefits taxable)

“It’s very important you’re on top of this,” says Deborah Graver, senior advisor, and partner at Signature Financial Planning in Pittsburgh. She adds that even if you normally get a tax refund, you could be required to send estimated payments if you have a large inflow of cash for a particular year.

How Much Do You Need to Pay?

When you file your 2015 taxes next April, the IRS will look to see if you’ve done one of the following:

1. Paid 100 percent of the amount you owed on your 2014 federal tax form.

2. Paid 90 percent of the taxes owed on your 2015 federal tax form.

The first option is applied only if your 2014 tax form covered all 12 months of the year. Otherwise, the IRS will look for you to pay 90 percent of what you owe for the current year. There are also special rules for high earners. Couples earning more than $150,000 are expected to send in payments equal to 110 percent of their 2014 federal taxes.

The tax code can be anything but simple which is why financial planners like Graver encourage everyone to consult with a tax professional for guidance on their particular situation. Tax software can also help you determine your quarterly payments.