What are Quarterly Estimates and Why Do I Need to Do Them?

Many employers withhold taxes before they process paychecks and send cash to federal agencies. Some managers also withhold funds and send money to government officials in the state as well. These procedures benefit employees because they get to pay their income taxes gradually.

Although this process can lead to a better refund check, other steps must be taken if you’re self-employed. In most cases, entrepreneurs must pay estimated taxes every quarter whenever any income doesn’t qualify for withholding. According to the IRS, the most common tax withholding income include:

  • Dividends
  • Alimony
  • Business profits
  • Profits from stock
  • Interest from income

Estimated Tax Requirements

Because every tax situation is different, some individuals may not need to pay estimated taxes. However, you should always approach tax situations wisely, as the government could charge fees if enough taxes weren’t paid through withholding during the previous tax season.

The Best Estimated Tax Option

Since penalties for underpayment can drain a business’s profits, you should choose the option that processes 100 percent of your company’s taxes in the previous year. If you generated over $150,000 in the past, the IRS will make you pay around 110 percent of the tax so that you’ll meet the safe-harbor requirement.

Key Strategies

Before tax season arrivals, you’ll need to calculate a proper tax estimate in the most effective and efficient manner. A good tax preparation program can provide big benefits throughout this time-consuming process. Your tax return statement from the previous year can be quite helpful as well because you can use it to figure out the potential income and deductions that you’ll get after current tax season paperwork is processed. If you’re going to calculate and estimate everything based on 100 percent of the taxes that were issued in the previous year, you must review the total tax that was paid.

Tax credits can be very beneficial if you’re trying to operate a business on a budget. Each credit gives you a reduction on a tax that was structured during the previous season. Many tax credits have a high value, so you may be able to pay for all of your estimated taxes without spending any of your own money.

Entrepreneurs and established business owners must understand the importance of paying estimated taxes because improper filing methods can lead for costly fees. Although the process can get expensive, a typical manager can save cash by using tax credits.

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