Why Keep Up with Estimated Tax Payments?

Estimated tax payments are confusing for many entrepreneurs, freelancers, and contractors. Business owners in these categories don’t usually have an accounting or finance background, but they are focused on the bottom line. It makes sense to question whether it’s really necessary to keep up with estimated tax payments. Can’t they just pay their taxes in one lump sum at the end of the year instead? 

The truth is that failing to keep up with estimated tax payments can lead to trouble. The good news is that with a little bit of planning and organization, you can easily stay on top of estimated tax payments and avoid these headaches. 

What are Estimated Tax Payments?

Estimated tax payments are payments made to the IRS each quarter based on a company’s projected income and tax liability. These payments are typically made by self-employed individuals who don’t have taxes automatically withheld from their paychecks. Taxpayers who receive income that’s not subject to withholding taxes, such as rental or investment income, should also make estimated tax payments.

Income taxes are a pay-as-you-go deal. When you work for an employer, the employer takes taxes out of each paycheck. The purpose of estimated tax payments is to ensure that self-employed individuals are doing the same thing — paying taxes throughout the year as the income is earned. 

The most significant benefit of keeping up with estimated tax payments is avoiding any penalties or interest charges the IRS assesses for underpayment of taxes. If you don’t make estimated tax payments, you may be subject to a penalty of up to 5% of the unpaid tax for each month or partial month that the payment is late. Also, interest accrues on any unpaid tax from the date it was due until the date it’s paid in full. These penalties and interest charges add up quickly, so it’s important to stay on top of your estimated tax payments to minimize the amount you have to pay overall.

Benefits of Making Estimated Tax Payments

Another benefit of keeping up with estimated tax payments is that it helps you budget throughout the year. When you make quarterly payments, you’re essentially spreading out your tax liability over the course of the year. The payments are smaller, which makes them easier on the budget. This is especially helpful for freelancers or small business owners who experience fluctuations in their income from month to month.

Lastly, not making estimated tax payments is sometimes a red flag for the IRS. It could trigger an audit — something that everyone would rather avoid!

Work with the Experts to Manage Your Estimated Tax Payments

If you suspect that you should be making estimated tax payments but don’t know where to start, Adams Accounting Solutions can help. We’ll help you determine your expected income and tax liability for the year, calculate your estimated tax payments, and ensure that you stay on track with them during the year. We can also provide you with valuable advice on how to minimize your tax liability and take advantage of any available deductions or credits. 

Give us a call today to schedule an appointment to go over your estimated tax payment situation. We’ll answer your questions and help you get organized, so you don’t have to worry about it for the rest of the year!