No matter what you do, taxes are simply a part of life. Under the vast majority of circumstances, there is little that you can do to escape this obligation. However, not everybody pays their taxes in the same way.
Some individuals are required to pay quarterly taxes instead of annual taxes. So, who pays quarterly taxes?
Let’s explore the information that you need to know.
As you might guess, business owners are one of the primary types of individuals who need to pay their taxes quarterly instead of annually.
This is simply due to the fact that business owners do not have their income tax withheld before they receive their payments. To elaborate, let’s assume that a W-2 employee makes $100,000 within a single year. This money has already been taxed before it hits their bank account.
If a business owner makes $100,000, none of this money has been taxed yet. So, it’s their responsibility to pay taxes on this amount based on factors like their tax bracket, income sources, etc. In some situations, business owners may choose to pay themselves as an employee of their own company.
This reduces their overall taxable income. However, there are many nuances associated with doing this correctly, and it’s in your best interest to speak to a financial advisor before taking this route. Otherwise, you may encounter legal complications in the future that could have long-term consequences.
On paper, independent contractors are highly similar to business owners.
They work for themselves and do not have income tax withheld from the money they earn. However, they don’t have the luxury of paying themselves as their own boss. This means that independent contractors need to consider their entire gross income when calculating their taxes.
To help compare this situation with that of an entrepreneur, consider the following example. Person A is an independent contractor who earned $80,000 last year. Person B is an entrepreneur who operates an S Corp and also earned $80,000 last year.
However, Person B only chose to pay themselves $30,000 in order to take care of their personal expenses. This means that their personal income was only $30,000 compared to the $80,000 of Person A. This also means that they have a significantly lower tax liability overall.
Despite the fact that independent contractors need to pay taxes on their entire gross income, they also still need to pay quarterly.
How Do I Pay Quarterly Taxes?
Although it might sound intimidating at first, paying quarterly taxes isn’t as imposing as it seems. The biggest issue that people encounter is the fact that they need to estimate the amount of money that they owe. In order to do so accurately, you will need to take your tax liability of the previous year and divide this number by four.
In the event that you paid $10,000 in taxes last year, for example, you could estimate that you will owe $2500 each quarter. However, you will still need to input certain information into the quarterly tax IRS forms.
For the average individual, this is a relatively complicated process that is best left to a tax professional. While making a mistake on a tax form isn’t guaranteed to get you in trouble, it could cause substantial delays.
You may also experience minor fees as a consequence. Happen to be a certified personal accountant and are looking for more work? You can check out this resource for more information about how to find jobs: www.taxfyle.com/cpa-jobs
When Are Quarterly Taxes Due?
It should come as no surprise to learn that quarterly taxes are due at the end of each quarter. Unless otherwise noted by the IRS, you’ll need to pay your estimated tax payments by April 15, June 15, September 15, and January 15.
These serve as the first, second, third, and fourth quarters respectively. In the event that you overpay your estimated tax payment, you can use your refund to contribute to the next quarterly payment.
For example, someone might owe $2000 as an estimated payment for the first quarter. However, they wrongfully assume they will owe $4000 instead.
In this scenario, their refund will cover their estimated tax payment for the second quarter.
What Happens if You Don’t Pay Quarterly Taxes Each Year?
If you choose not to pay your quarterly taxes, you will have to pay a larger amount when you file your annual return.
For those who have the money on hand, this often isn’t a big deal. If you don’t manage your money carefully, however, you could find yourself with a bill that exceeds tens of thousands of dollars. In the event that you are not able to pay this lump sum at the time you file, you’ll need to work with the IRS to establish a payment plan that can accommodate you.
If you are still unable to pay this amount, you could experience extensive financial and legal penalties. Under most circumstances, however, the IRS simply wants their money — they will work with you to help ensure that they get it.
So, Who Pays Quarterly Taxes?
As you can tell from the above guide, many individuals who are not conventional W-2 employees will need to pay quarterly instead of annually. So, keep this information in mind about who pays quarterly taxes so you can satisfy all of your tax obligations sufficiently.
Looking for more tips that can help you out later on? Check out the rest of our blog for plenty of more useful information.