Updated March 12, 2024
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 circ*mstances, you could be required by the Internal Revenue Service (IRS) to pay estimated taxes throughout the year?
Collected once per quarter, these quarterly taxes keep certain taxpayers on top of their yearly tax obligations.
Today, we want to talk about the difference between annual taxes and quarterly taxes, what impact they may have on your tax returns later, and a few other tax-related questions.
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, if you earn a salary or wages, you can see that a portion of your paycheck is taken out each month and used to pre-pay your tax obligation regularly throughout the year. Once a tax return is filed during tax season, you pay the final amount owed to the IRS or receive a refund if you’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. This is often the case for people who are self-employed, contractors or freelancers, although it can apply to others as well.
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.
Related: What is the Difference Between a Tax Credit and a Tax Deduction?
Why Do People Have to Pay Quarterly Taxes?
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:
- Interest
- Dividends
- Alimony
- Self-employment income
- Capital gains
- Prizes
- Awards
Related: What to Do When Your Income Reaches 7 Figures
Who Pays Quarterly Taxes?
Individuals who are expected to owe $1,000 or more when filing returns 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.
Related: SEP IRAs: The Business Owner’s Best Friend When It Comes to Minimizing Taxes
When Are Quarterly Taxes Due?
Just as they sound, quarterly taxes are due at the end of each quarter. The deadlines shift a little each year.
For the 2024 tax year, the deadlines are:
- April 15, 2024
- June 17, 2024
- September 16, 2024
- January 15, 2025
While you must pay a predetermined 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?
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 period
How Do I Find Out How Much I Should Pay in Quarterly Taxes?
The Internal Revenue Service created a tool specifically for this purpose called the Tax Withholding Estimator. It allows individuals and couples to determine how much they could be required to owe when filing their tax return.
The IRS recommends using the estimator at the beginning of the year, especially if you’ve recently experienced a major life event (e.g., marriage, birth of a child, bought a home, etc.).
How Do I Pay Quarterly 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.
If you prefer to send them in, here are instructions straight from the IRS:
You may send estimated tax payments with Form 1040-ES by mail, or you can pay online, by phone or from your mobile device using the IRS2Go app. You can also make your estimated tax payments through your online account, where you can see your payment history and other tax records. Go to IRS.gov/account. Visit IRS.gov/payments to view all the options.
The IRS also recommends the Electronic Federal Tax Payment System (EFTPS) as a good option for all your tax needs, not just paying quarterly taxes.
What Happens if I Don’t Pay Quarterly Taxes?
If you underpay or don’t pay quarterly taxes, you may have to pay a fine when you file at the end of the year. If you owe less than $1,000 at the time of filing, you probably won’t have to do so, but it’s best to stay current just in case –nobody likes an unexpected tax bill.
How you pay your taxes throughout the year can impact your tax return come filing season. And in certain circ*mstances, 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.
Schedule a Consultation with Paradigm Advisors
While we don’t do taxes at Paradigm, we love helping business owners and self-employed individuals optimizes their taxes as part of your overall financial plan. Click here to schedule a call with a Paradigm advisor today.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. 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.
Paradigm Advisors is a fee-only financial planning firm based in Dallas, Texas and Fayetteville, Arkansas. Paradigm Advisors provides comprehensive financial planning and investment management services to help clients organize, grow and protect their wealth throughout life’s journey. Paradigm specializes in advising young professionals and entrepreneurs in the early stages of life and well-established career executives through financial planning and investment management. As a fee-only fiduciary and independent financial advisor, Paradigm never receives commission of any kind. Paradigm is legally bound by certification to provide unbiased and trustworthy financial advice.
