Is it Better to Over or Underpay Your Estimated Quarterly Taxes?

Self-Employed Resident in Brookline NH Looks for Advice

Ideally your estimated tax payments will be as close to the amount of taxes owed as possible, leaving you breaking even at the end of the year. If you wind up owing more than $1,000 to the IRS when it comes time to file your taxes, you can face a penalty for underpayment. Pay too much in estimated taxes and the government is left earning interest, money that could have been in your pocket throughout the year. With a business that has fluctuating sales and income, you will likely need to adjust your quarterly payments based on income and expenses.

A Brookline resident had recently started freelancing. One of the challenges he found that goes hand in hand with self-employment is paying estimated quarterly taxes. For advice, he contacted the team at Merrimack Tax Associates.

Determining How Much Estimated Tax to Pay Each Quarter

If your income is a set amount and does not fluctuate throughout the year, it is easy to decide how much to pay in estimated taxes each quarter. However, for many self-employed individuals this number can vary greatly seasonally or as business ebbs and flows. To determine your estimated taxes owed, you will need to know your profit. This is your income for the quarter, less any expenses. Once you have determined your profit you can use your tax rate to determine how much you should be paying each quarter.

Rolling an Overpayment into the Following Year’s First Quarter Taxes

When there is an overage in quarterly taxes paid and you are expecting a tax refund, it can be easier to simply roll this money into the first quarter’s estimated taxes. This way you are not left waiting for the money to be received. The time it takes to receive your refund can depend on many things, including the workload for the IRS to process your tax return. By applying the refund to the following quarter, you can instantly realize the money.

If you find that your tax return has a significant overage or underpayment in estimated taxes, you can adjust for the following year. Tweaking the calculations used to determine how much you will need to pay in estimated taxes can help to get you as close as possible to the actual number.

The Brookline resident was pleased to have a better understanding of estimated taxes and how he should be calculating this every quarter.