The Pros and Cons of Quarterly Estimated Tax Payments
Quarterly estimated tax payments are required for most small business owners, freelancers, and self-employed individuals who expect to owe $1,000 or more on their income tax return at the end of the year. These payments help avoid a large tax bill, but they come with both advantages and challenges.
Join our Raleigh small business accountants from C.E. Thorn, CPA, PLLC, as we cover everything you need to know about making your estimated payments. We are here to help you stay on top of your quarterly obligations for federal and state taxes to avoid penalties.
Table of Contents
What Are Quarterly Estimated Tax Payments?
Quarterly estimated tax payments are payments made four times a year to cover income taxes, self-employment taxes, and other obligations for individuals who are not subject to automatic withholding. This might include business owners, freelancers, and self-employed workers. These payments are due in April, June, September, and January, based on the income earned during the previous quarter of the tax year.
The IRS requires individuals to make estimated tax payments if they expect to owe $1,000 or more in taxes for their annual return. In order to stay compliant on your tax payments, they are made throughout the year instead of a large lump sum at tax time.
2025 Estimated Tax Deadlines
For the 2025 tax year, the IRS has set the following important tax deadlines to pay estimated taxes:
- First Quarter: April 15, 2025
- Second Quarter: June 16, 2025
- Third Quarter: September 15, 2025
- Fourth Quarter: January 15, 2026
Who Should Make Quarterly Estimated Tax Payments?
Individuals who owe estimated taxes on a quarterly basis are:
- Self-Employed Individuals: Contractors, sole proprietors, freelancers, and those who earn self employment income who do not have taxes withheld from their earnings.
- Business Owners: Owners of LLCs, S-corporations, and partnerships where federal income taxes are not automatically deducted from business income.
- Investors: Individuals with significant investment income that is not subject to withholding, such as dividends or capital gains.
- Other Individuals with Unearned Income: People with rental income, alimony, or other non-wage income that isn’t automatically taxed.
Pros of Making Quarterly Estimated Tax Payments
Paying quarterly estimated taxes has several benefits, especially for self-employed individuals, business owners, and those with significant non-wage income.
Avoid Penalties and Interest
By making quarterly payments, you ensure that you’re paying your taxes throughout the year, rather than facing a large bill at the end. This helps avoid an estimated tax penalty for underpayment and interest that the IRS imposes when you don’t pay enough during the year.
Helps With Cash Flow Management
Quarterly payments help break down your tax liability into manageable chunks, making it easier to plan and manage your finances. Business owners and freelancers can more easily incorporate these payments into their regular cash flow cycle, instead of having to come up with a lump sum at tax time.
Reduces Tax Time Stress
Paying taxes through quarterly payment periods spreads out your financial responsibility, reducing the burden of a large tax bill during tax season. It also gives you a clearer picture of your tax obligations, so you’re not caught off guard when it’s time to file. This can help reduce stress and simplify the tax filing process.
Tax Deduction Benefits
In some cases, the IRS allows business owners to deduct their quarterly tax payments as part of their business expenses. This can provide a small tax-saving benefit while helping to lower the overall taxable income.
Cons of Making Quarterly Estimated Tax Payments
While quarterly estimated tax payments offer several advantages, they also come with some challenges.
Complexity of Calculations
Calculating your quarterly estimated tax liability can be complicated, especially if your income fluctuates throughout the year. You need to estimate your earnings, industry specific deductions, and tax credits, which can lead to overpayment or underpayment if done incorrectly.
Cash Flow Impact
Making quarterly payments can put a strain on your cash flow, particularly if your income isn’t steady and you are required to make unequal payments. For business owners with seasonal or unpredictable earnings, setting aside money for quarterly taxes can be difficult. In some cases, paying quarterly taxes may require sacrificing other business expenses or personal savings to meet the due dates.
Risk of Underpayment
If your estimated income is incorrect or you miss any deductions, you could end up with an underpayment of estimated tax. Even small errors can snowball, especially if your income varies throughout the year.
Administrative Burden
Keeping track of due dates, calculating payments, and submitting the necessary forms takes time and effort. For busy business owners or self-employed individuals, this administrative work can feel like an added burden.
The Cost of Not Paying or Underpaying Quarterly Taxes
Failing to make quarterly tax payments or underpaying can result in significant consequences, both financially and legally. The IRS imposes penalties and interest on unpaid or late taxes, which can quickly add up.
Here’s what you need to know:
- Penalties for Underpayment: If you underpay your estimated taxes, the IRS will assess an underpayment penalty, calculated based on how much you owe and how long it goes unpaid.
- Interest on Late Payments: The IRS charges interest on overdue taxes. This interest accrues daily and can significantly increase the amount you owe over time.
- Compounding Costs: Penalties and interest can compound quickly, making the cost of missed or late payments much higher than the original tax obligation.
- Impact on Future Payments: Underpaying taxes one quarter could lead to higher required payments in future quarters, making it harder to catch up.
- Potential for Audits: Consistently failing to pay or underpaying your taxes could raise red flags with the IRS, potentially leading to audits or further scrutiny of your tax filings.
Can You Avoid Quarterly Payments?
Here are a few ways to avoid making quarterly estimated tax payments:
- Increase Your Tax Withholding: Adjust your withholding to cover your tax obligations through your paycheck.
- Pay Taxes Through Other Means: Make a lump-sum payment at the end of the year if you don't owe more than $1,000.
- Lower Your Income: Use deductions or credits to reduce your taxable income below the $1,000 threshold.
- Consult a Tax Professional: Work with a CPA to optimize your tax strategy to avoid quarterly payments, find opportunities to gain refundable credits, and lower your income tax liability.
Contact Our Raleigh Tax Consultants Today
If you're unsure about your quarterly estimated tax payments or need assistance with tax planning, our team at C.E. Thorn, CPA, PLLC is here to help. Our tax planning and prep CPAs can help you navigate your tax obligations, optimize your strategy, and ensure you’re making the right payments at the right time.
Contact us today to schedule a consultation and take control of your taxes by calling 919-420-0092 or filling out our online contact form to get started.
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