As a business owner, it's imperative you know whether you should pay your taxes quarterly or yearly. While individuals pay their federal income tax as they receive or earn income throughout the year, the process can look a little to a lot different for small businesses and individual contractors. This difference is due to the fact that federal taxes are not automatically deducted or withheld from business income.
Based on your unique situation, you may be expected to pay taxes in quarterly payments or in a lump sum annually. Because of the different outcomes, it can be slightly confusing for business owners when tax season rolls around. However, you're not alone.
At John F. Dennehy CPA, we offer bookkeeping, tax planning, tax preparation, individual preparation, and accounting services to help small business owners navigate the complex landscape of tax planning and preparation.
We will work closely with you to help you confidently answer the question of "Should I file taxes quarterly or yearly." Let's take a closer look at tax planning and filing for businesses to learn whether you should file taxes quarterly or annually. And if you have any questions or would appreciate a more tailored approach, don't hesitate to reach out to the team at John F. Dennehy CPA today.
A Closer Look at Annual Taxes
The Internal Revenue Service (IRS) measures the amount of money each person or business owes by looking at the gross income for the entire calendar year and taking into consideration any credits, exceptions, or deductions. A majority of people pre-pay their taxes throughout the year by having a portion of their earnings withheld; then, once April of the following tax year comes around, they pay their remaining balance owed (or receive a refund).
If someone wants to change how much is deducted from their paycheck, they need to go to their employer and ask to fill out a new IRS Form W-4 to make the wanted adjustments. Filling out a new form can help ensure you aren’t left with a large tax balance when it’s time to file due to underpayment, nor are you overpaying throughout the year (leaving you with a smaller check).
Using these types of individual tax strategies is a smart way of controlling how much money you have throughout the year. If you decide not to pay taxes through withholding, it may be a good idea to make quarterly estimated tax payments so you won’t be left with a big owed payment at the end of the year.
What Types of Businesses Should Pay Taxes Quarterly?
S-corporation shareholders, partners, and sole proprietors may need to make quarterly tax payments throughout the year to cover their tax liability and avoid any payments resulting from underpayment.You may fall into this category if any of these scenarios fit your situation.
Do You Receive Untaxed Income?
If you receive untaxed income throughout the year, you may want to consider paying quarterly taxes. This includes anyone who receives income from dividends, interest, alimony, prizes, capital gains, or awards. Rental income and other types of investments can also be considered untaxed income.
Are You Considered Self Employed?
If you are considered self employed, you may need to pay your taxes quarterly. This includes independent contractors, freelancers, or anyone in business for themselves. Filing estimated quarterly taxes in advance will help pay the required self-employment tax, income tax and alternative minimum tax.
Are You Concerned About Not Withholding Enough?
If you are concerned about not withholding enough, you may want to consider paying taxes quarterly. If you’ll owe at least $1,000 when it’s time to file income taxes, making quarterly payments every 3 months will help ease the burden at the end of the year.
Do You Recieve Untaxed and Regular Wages?
If you have a full time job where you're paid on a W2 with taxes being withheld and you either contract, freelance, or earn untaxed income, paying taxes quarterly may be a sound way to manage your tax burden.
Receiving income from regular wages and untaxed income can make it easy to underpay income taxes. For example, if you don’t factor in your untaxed income into the withheld amount, you can end up receiving an estimated tax penalty without fully comprehending that you were supposed to be making an estimated payment all along.
Calculating Estimated Taxes
Depending on your financial situation, there are different ways to file taxes quarterly or yearly. If your income is steady and you want to make quarterly payments, divide by four the amount you think you will owe at the end of the year (i.e. if you will owe $6,000, pay $1,500 every 3 months.).
If your income varies and you want to decide between quarterly and yearly payments, estimate the amount you’ll owe by basing it on what you’ve earned during the current year. If you need assistance, use an IRS worksheet to help you figure out your payments and liabilities.
When making quarterly calculations, be sure to factor in your adjusted gross income, taxes, taxable income, credits and deductions for the year. If the idea of making all these calculations seems overwhelming to you, feel free to reach out to experts at John F. Dennehy CPA today for expert assistance.
Contact John F. Dennehy CPA for Help Determining Whether You Should File Taxes Yearly or Quarterly
Determining whether it's best to file your taxes quarterly or yearly can be confusing. And once you decide which time is most ideal, accurately calculating your tax refund or liability can be even more taxing. However, you're not alone. At John F. Dennehy CPA, you have access to an entire team of experienced accountants and CPAs who will work closely with you to guide you to and through the best solution.
Contact John F. Dennehy CPA today to learn more about how we can help.