Anyone who earns income, whether it's from wages or investments, is likely to be liable for federal income tax. While most workers pay income tax at the end of the year after having their employers withhold taxes from each paycheck, others risk large tax bills and penalties unless they file their taxes quarterly. Filing quarterly can save a great deal of money for the right taxpayers.
Quarterly Filing Requirements
Only certain taxpayers need to file quarterly. In general, they are those taxpayers who have incomes but don't contribute to their tax liabilities through paycheck withholdings or other contributions throughout the year. For example, self-employed workers receive the full value of their pay and must make their own tax contributions to avoid large tax bills at the end of the year. Likewise, investors who receive money from investment interest or sales are responsible for tax on that income, but may not pay it at the time of receiving it, creating a need to file quarterly.
One of the key ways that filing taxes quarterly can save you money is by eliminating the underpayment penalty that the Internal Revenue Service imposes on taxpayers who owe too much. As of 2011, if your total tax bill exceeds $1,000, the IRS requires you to calculate your penalty and pay an additional amount based on how much you owe in taxes. By filing quarterly and making four payments throughout the year, you pay your taxes as you earn the income they apply to, reducing the chance of an underpayment penalty.
Filing quarterly taxes can save you money in ways other than avoiding underpayment penalties. Without making quarterly payments, you may face an unaffordable tax bill at the end of the year. If you seek an extension, you'll pay interest on the amount that you don't pay by the initial due date. Failing to make payments or file for extensions will incur interest charges and penalties, in addition to your underpayment penalty. Filing quarterly can help avoid all of these penalties and charges.
Quarterly Filing Process
The process of filing quarterly taxes is relatively simple. Once you complete an IRS form to calculate your estimated payments for each quarter, you must simply submit a payment slip, along with a check, four times throughout the year. There are no additional calculations needed unless your income level changes significantly. Quarterly payments are due in March, June, September and January. When you file a year-end tax return, you'll be able to subtract the total of your four payments from the amount you owe in total tax.
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