What Are The Advantages of Pre-Paying Your Taxes Quarterly

It can hurt to have to make your annual tax payment. When you drop the check in the mail on April 15th, you undoubtedly wonder if there is an easier way to pay your taxes. While it is impossible to avoid tax payments, you can take some of the sting out of the April 15th deadline by prepaying your taxes. Most people who choose to prepay their taxes do so quarterly.

Paying quarterly is popular amongst self-employed people and people who work as contractors or otherwise do not have an employer who withholds taxes from their weekly or bi-weekly paychecks. For people who choose to follow the quarterly payment schedule that is most popular, the “due dates” for taxes are January 15th, April 15th, June 15th and September 15th. This type of payment is based on an estimate, usually from your previous year’s tax returns. If you take your taxable income and divide it by four, and it is then possible to figure out how much to prepay. For example, if you make $40,000 per year, you taxable income per quarter is $10,000. Currently, that puts you in the 15% income tax bracket, so your quarterly payments would be 15% of $10,000, or $1,500 per quarter. Of course, if you are self-employed, then the self-employment tax is also part of the equation.

It is important to keep in mind the fact that the figures that you decide on for your quarterly payments are estimates only. Since you are figuring your entire annual income before you actually earn it, you could be paying too much or too little. Of course, if your estimates are higher than the amount that you actually make, you should get a refund on any overpayments. However, if you underestimate, then you may have to make a larger payment on April 15th.

If you are an employee who has estimated taxes withdrawn from your pay check, then making quarterly payments might not be the best approach.

Payments can be made via mail or via the Electronic Federal Tax Payment System, also known as EFTPS. The EFTPS is an online payment system that makes it more convenient to make tax payments. The system also allows users to set up monthly payments. This can make paying taxes even more manageable. Small business owners and freelancers often opt for this type of payment scheme because the payments are more manageable and can become part of the monthly business budget rather than a steep one-time payment on April 15th. Does this actually mean that you will pay fewer taxes because you are paying more often? Of course not, but it makes the payments more manageable.

If you are very organized, you can earmark a certain portion of your income for taxes as you receive it throughout the year. Perhaps you can even play the game a little bit by investing the money earmarked for tax payments instead of making the prepayment. If you can do this, then the money that will be used to pay taxes is working for you instead of sitting in an IRS vault somewhere. Of course, you will have to be careful because when you take the money out of your investment vehicle: whatever interest you earned or gains that you made will be taxed. This is fine as long as the gains do not put you into a higher income tax bracket. This is something that self-employed people have to be very careful about. This could be the difference between paying 15% of your income in taxes and paying 25% of your income as taxes. So it is possible to be savvy with your tax money and still end up losing if your savviness leads you into a higher income tax bracket.

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