Even though many of us only consider paying taxes once a year as everyone is accustomed to doing so, not everyone does. Did you know that the Internal Revenue Service (IRS) may in some cases require you to make yearly estimated tax payments?
You can pay these taxes by withholding income from your paychecks (as most W2 employees do) or by making estimated quarterly tax payments (which 1099 and self-employed individuals often do), depending on your work and employment situation.
These quarterly taxes, which are only due once every three months, help some taxpayers stay on top of their yearly tax obligations and prevent fines from owing too much by the end of the year.
How do you decide whether to make quarterly payments or stick with annual taxes, then? This will be greatly influenced by the kind of work you do and how you get paid.
Find out more about the difference between yearly and quarterly taxes, the forms you must complete, and whether you must pay annual or quarterly taxes in the article below.
Difference Between Yearly and Quarterly Taxes
Annual Tax Payments
Most people will pay taxes yearly.
The Internal Revenue Service (IRS) weighs gross income for the calendar year and modifies it for certain exceptions, credits, and deductions to determine how much each household owes each year.
Most persons who receive salaries and wages have a portion of their income deducted from their paychecks throughout the year to cover their tax obligations. When they submit their yearly income tax return, the total amount due is then balanced. You have to pay your annual taxes once a year. The annual taxes are typically paid in April of the succeeding tax year.
While you are technically paying annually, in most cases your employer is withholding taxes from each paycheck and paying them quarterly on your behalf, based on how much you designated to be withheld from each paycheck on your W4 form.
Quarterly Taxes
If you do not have withholdings—automatic deductions from your paycheck that reduce your tax liability for the year—you may need to pay approximated taxes every quarter.
Generally, people who anticipate owing $1,000 or more when their tax return is filed are obliged to make quarterly estimated tax payments. (If you file a Schedule C or 1040, you’re one of these people!).
According to the IRS, this typically consists of sole proprietors, partners, and shareholders of S corporations as well as business owners and independent contractors.
You have to pay your quarterly taxes four times a year. At the end of each quarter, taxes are due in April, June, September, and January of the following year (unless other conditions apply, like when the IRS delayed deadlines due to COVID-19).
Use IRS Form 1040-ES to recalculate your tax liability and modify your upcoming quarterly payment if you overestimate or underestimate your tax obligation.
To prevent any fines, you should make sure your income estimate is as exact as possible.
| Comparison | Annual Taxes | Quarterly Taxes |
|---|---|---|
| Differences | Filing all of your taxes after every fiscal year (12 months). | Paying estimated taxes every 3 months to file annual returns. |
| Deadline | The annual taxes are typically paid in April of the succeeding tax year. | At the end of each quarter, taxes are due in April, June, September, and January of the following year. |
| Forms to File | You can use Form 1040 to file annual tax returns. | You can use the IRS Form 1040-ES to calculate your estimated quarterly taxes. |
Case 1: You are Self-Employed
Answer:
You must typically file an annual return and pay estimated tax quarterly if you are a self-employed person.
Self-employed people typically have to pay both income tax and self-employment (SE) tax. Self-employed individuals are most likely to pay a Social Security and Medicare tax which is known as the SE tax.
This tax could be compared to the Social Security and Medicare taxes that are deducted from the wages of individuals who are employed. Self-employment tax often solely pertains to Social Security and Medicare taxes, not any other taxes (like income tax).
Many self-employed individuals will pay 30% off their income each quarter for estimated taxes, to avoid owing thousands and sometimes tens of thousands of dollars (plus fines) by the end of the year.
Forms to Submit:
If you are self-employed, you may consider using Form 1040-ES to file your taxes.
Since you are your employer, Social Security, Medicare, or income taxes are not withheld for you, so you must pay them yourself using the estimated tax method.
The estimated tax for individuals, Form 1040-ES, is used to calculate these taxes. A worksheet on Form 1040-ES is comparable to those on Forms 1040 and 1040-SR.
To complete Form 1040-ES, you must have your annual tax return from the previous tax year.
To determine whether you must submit quarterly estimated tax, the IRS offers a worksheet included in Form 1040-ES, Estimated Tax for Individuals.
Filing Method
Below are some of the methods you can use to pay your taxes.
- You can use the Electronic Federal Tax Payment System to submit your quarterly payments once you’ve calculated them.
- The IRS also provides paper forms on which you can make payments. You’ll pay the remaining taxes that weren’t covered by your quarterly payments when you submit your yearly tax return.
- After filing Forms 1040 or 1040-SR and revealing an overpayment of tax, you also have other alternatives. Instead of receiving a refund, you can use all or a portion of your overpayment to reduce your anticipated tax for the current tax year.
Case 2: You are a non–profit organization
Answer:
The IRS requires the majority of tax-exempt organizations to submit annual tax returns.
Forms to Submit:
The majority of tax-exempt nonprofit organizations must file an informational return with the IRS even though they are generally exempt from paying federal taxes (that is what the term “tax-exempt” means).
You may consider the following forms while filing your taxes:
- Form 990: Many federally tax-exempt organizations must file the IRS Form 990 as their annual reporting document. This form, which contains details on the nonprofit’s objective, programming, and finances, enables the IRS and the general public to assess the organization’s operations.
- Form 990-EZ, 990-N: The filing year and the organization’s gross receipts determine the type of Form 990 that must be submitted by the organization. Among the various forms are Forms 990, 990-EZ, and 990-N.
Tax and accounting in the non-profit sector is quite different from typical businesses, so if you’re unsure about taxes and filing, speak to an accountant who specializes in this field.
Filing Method
The IRS asks to file Form 990 electronically. However, before 31 July 2021, the IRS used to give the flexibility to file your taxes electronically or using paper.
Case 3: You Own a Business
Answer:
Small business owners must consider paying their estimated taxes on quarterly taxes. This is also true for most corporations, which will also pay estimated taxes every three months.
Since a business is subject to heavy cashflows, the kind of regulations and tax obligations you may have to deal with can vary from year to year. It is always recommended to keep an update on your taxes while paying quarterly taxes, so you can avoid any monetary penalties for late filings.
Forms to Submit:
You may need the following forms to file your quarterly taxes.
- Form 941: this includes federal income, security, and medicare taxes.
- Form 720: this includes excise taxes on your business.
Filing Method
You can file all these taxes electronically. Moreover, the IRS gives the flexibility to submit these forms at any hour during the day.
| Case | Answer | Forms to File |
|---|---|---|
| You are Self-Employed (1040 or Schedule C) | File quarterly & annual taxes | Form 1040-ES & Form 1040 |
| You are a non–profit organization | File annual tax returns | Form 990, Form 990-EZ, Form 990-N |
| You Own a Business | File Quarterly Taxes | Form 941, Form 720 |
Why You Should Talk With A CPA
It’s highly critical to talk with an experienced CPA. You may never the kind of tax strategy you should choose, it involves a great deal of interpreting tax rules and regulations. You may be paying your taxes without realizing you are also paying penalties.
Talk to a tax expert like a CPA if you need assistance with your annual or quarterly taxes. They can assist you with filing your annual return and making precisely estimated payments for taxes, which is always a continuous procedure. A CPA, on the other hand, will examine the scene to look for tax savings potential and assist you in making plans for the following year; in other words, they become your trusted advisor.
Depending on which one will benefit you most, they can assess your financial status and assist you in determining whether you should file your taxes annually or quarterly (they can also manage filing for you!)
Conclusion
Your tax return when filing season rolls around may be impacted by how you pay your taxes throughout the year. Work with your dependable tax advisor to make sure you’re deducting the right amount from your income, beneficially lowering your tax obligations, and avoiding potential fines or hefty payments come tax time.
Frequently Asked Questions
Q1. How Do I Know if I am Required to Pay Quarterly Taxes?
A. This is determined by whether you are self-employed, a small business owner, or a traditional W2 employee. As a W2 employee, your employer will withhold additional money from your paycheck based on your W4 form to have taxes withheld from your paycheck, and you won’t have to pay quarterly taxes.
The IRS offers a Tax Withholding Estimator that they advise using at the start of the year, particularly if you’ve recently gone through a significant life event.
If you meet all three of the following requirements, you are exempt from paying quarterly taxes, according to the IRS:
- There was no outstanding tax debt from the prior year.
- You’ve spent the entire year as a citizen or resident of the United States.
- Your prior tax year consisted of a full calendar year.
If you are a Schedule C or self-employed, or reading this on behalf of a business, you likely need to pay quarterly taxes.
Q2. Can you Get a Penalty for NOT Paying Quarterly Taxes?
A. Yes. If you owe too much by the end of the year, you may owe a penalty for owing too much.
Additionally, if you miss a quarterly payment, the IRS will normally deduct 0.5% of your total debt once a deadline has passed. The penalty rises each partial or full month when the tax is not paid in full. It is limited to 25%.
Q3. Can I Pay my Quarterly Taxes Online?
A. Yes, you can.
Using the IRS2Go app, or IRS.gov, you can make payments online or through a mobile device. Your online account, where you may view your payment history and other tax details, also allows you to make approximated tax payments. Be sure to keep your receipts! You will need these when it comes time to file your taxes for the year.
To see all the options, go to IRS.gov/payments. Consult Publication 505, Tax Withholding and Estimated Tax, for more details.
