Most people only need to think about taxes once a year. Sometime between the end of January and the middle of April, they file an annual income tax return with the Internal Revenue Service and the state. They may even receive a sizable refund because their employers withheld more than they needed to pay for the year.
Other people are not quite so fortunate. Millions of taxpayers in the United States must submit estimated quarterly tax payments. Every year, they must pay money directly to the federal government and the state based on their likely income tax obligations. These quarterly payments are due in April, June, September and January of the following year.
What scenarios make people responsible for quarterly estimated taxes?
1. Self-employment
Independent contractors who fill out a 1099 instead of a W-2 are responsible for their own income taxes. With exceptions for the first year where they work as independent contractors, self-employed professionals typically need to make quarterly tax payments and then pay any remaining balance due when they file their annual income tax return.
In addition to paying quarterly, they can also expect to pay a somewhat higher amount in taxes because the companies or people who hire them to provide services do not contribute to employment taxes.
2. Business ownership
Those who run businesses or professional practices typically need to make estimated quarterly tax payments. They must make payments on behalf of the business in addition to any personal obligations that they may have if they are also self-employed.
3. Irregular income sources
Perhaps a successful professional has made significant financial investments and received dividend payments for their stock holdings. Maybe someone with a salary also has income from renting out a duplex.
Those with irregular income or sources of income other than traditional employment may need to pay estimated quarterly taxes. Anyone who might theoretically owe $1,000 or more in income taxes when they file their return likely need to pay estimated quarterly taxes in addition to their annual income taxes.
Seeking professional guidance about complex income tax matters can make a major difference for those with unusual income tax obligations. Taxpayers who secure appropriate support are less likely to make mistakes and oversights that lead to audits, penalties and tax controversies.