Keeping Up with Quarterly Taxes

As of 2015, there were roughly 15 million self-employed people in the United States. About 9.5 million had not incorporated their businesses, while the remaining 5.5 million had incorporated.1 Either way, most of these entrepreneurs and freelancers don't have an employer that withholds taxes for them.

Sole proprietors, S corporation shareholders, and other self-employed individuals who expect to owe $1,000 or more in federal taxes when they file their returns must make estimated tax payments. This involves a fair amount of guesswork, but calculations are typically based on the previous year's tax liability.

Even employed individuals who receive income from other sources (including investments) could be subject to estimated tax payments if they will owe $1,000 or more in taxes after salary withholding.

Estimated tax payments for a given tax year are typically due in four equal installments: April 15, June 15, and September 15 of the current year, and January 15 of the following year. Making accurate quarterly tax payments on schedule can help you avoid interest penalties for under-payment and keep you from falling behind with the IRS.

IMAGE

Underpayment Penalties

Unfortunately, penalties begin accruing as soon as you miss one quarterly payment. The IRS charges interest daily until you catch up. The annual rate, currently 3%, is subject to change each quarter.

For planning purposes, keep in mind that underpayment penalties usually do not apply in the following two situations.

  • Your withholding and estimated tax payments add up to at least 90% of your tax liability
  • Your withholding and estimated tax payments are at least 100% of the previous year's tax bill (110% for certain high-income taxpayers)

Thus, employed taxpayers could help reduce or eliminate interest charges by increasing their salary withholding enough to offset estimated payments.

If your income tends to be higher at the end of the year, you may want to use the "annualized method" instead of making four equal payments. This way, estimated payments correspond to your cash flow, so you won't face big installments on earlier due dates before you can pay them.

The specific rules regarding estimated tax payments are fairly complex. Before you take any specific action, be sure to consult with your tax professional.

 
Waddell & Reed
1010 Stony Hill Road Suite 250 Yardley, PA 19067
Securities and Investment Advisory Services offered through Waddell & Reed, Inc., a Broker/Dealer, Member FINRA/SIPC and a Federally Registered Investment Advisor.

Insurance products are offered through insurance companies/agencies with which Waddell & Reed has sales arrangements.

Investment and Insurance products offered through Waddell & Reed, Inc. : Not FDIC/NCUA Insured • No Bank Guarantee • May Lose Value

The information on this site is for general informational and educational purposes only and is not to be considered an individualized recommendation or personalized investment advice. Please consult a professional prior to making financial decisions and keep in mind that investing involves risk including the potential to lose principal.

This site is published for residents of the United States only. Financial Advisors of Waddell & Reed, Inc. may only conduct business with residents of the states and/or jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all of the products and services referenced on this site may be available in every state and through every advisor listed. For additional information please contact the advisor(s) listed on the site, visit the Waddell & Reed, Inc. corporate site at www.waddell.com, or contact the Waddell & Reed compliance department at 800-532-2762.

Much of the content provided on this site written and provided by Emerald Connect, LLC. Waddell & Reed, Inc. and Emerald Connect, LLC are not affiliated companies.

Privacy Policy