Why Should Self-Employed People File Quarterly Taxes?

in All Items, Filing Taxes, Quarterly Taxes, Self-Employed, Tax Information

Many self-employed individuals feel that it is a wise choice to file their taxes on a quarterly basis. Some feel that doing so helps them to stay more organized and to keep better track of deductions, earnings, and other related figures. No matter how you feel about quarterly taxes, you should know that, in some cases, you may not have an option as to whether or not you file quarterly. It is required of some self-employed individuals and not adhering to this regulation could land you in some serious trouble, not to mention with potential fines and fees to pay.

The rule of thumb is that if you are going to owe $1000 or more for taxes, not including your withholdings, and if you had a tax liability the previous year, you will likely be required to file quarterly. If you are unsure about whether or not these things apply to your situation, ask an accountant or a tax preparer for advice. It is good for you to have one of these professionals on hand if you are self-employed anyway, since you are likely to come across many questions and uncertainties as you work to manage your business and/or your career.

If you are required to file quarterly, keep in mind that all you are really filing is an estimate of your taxes. Your math doesn’t have to be perfect, but it should be based in fact. You will need to come up with a reasonable estimate of your expected gross income, the deductions for which you will file, and your taxable income. You should also be able to estimate your tax credits. Obviously, coming up with an estimate, particularly when it’s still early in the tax year, can be a challenge. If you’ve filed quarterly estimates before, last year’s estimates can provide you with a fairly good idea, adjusted for any changes, of where you should be. However, the only way to truly come up with an accurate estimate is through detailed recordkeeping. Even then, remember that you are not expected to be able to see the future, and any discrepancies between your estimate and what actually happens can be excused, providing your estimates were reasonable at the time that they were given.

Just remember that the laws surrounding taxation can change from year to year, and it’s up to you (or the professional you hire) to stay on top of changes that will affect your estimates. Furthermore, certain other factors could cause your estimates to be quite different from one quarter to the next. If you, for example, suddenly start making more or less money, you’ll need to make that obvious. Likewise, having children, getting married, opening a new business, and hiring or letting go of employees can all cause changes. Don’t make the mistake of just blindly copying down the figures you used last quarter. Always take the time to really consider what is different in your life and in the world around you and how that might affect your taxes.

Have a tax question? Ask one of our tax professionals.