WTF (What the Finance?) Are Estimated Tax Payments?

Those of you small business owners will be familiar with the idea of quarterly estimated tax payments.  The idea is that the IRS does not want to wait until April 15th to get all of their tax revenue from you.  They want some all during the year.

For people who are paid on a W2 (aka regular paycheck), taxes are withheld from each paycheck which makes the IRS mostly happy.  I say mostly because if you get large windfalls, like Restricted Stock Units, commissions, or bonuses that don’t have taxes withheld, you could get hit with surprise taxes and even more surprising penalties for paying said taxes late.

Enter the Quarterly Estimated Tax Payment.  These payments are designed to keep those who aren’t having taxes withheld from a paycheck current with the payments.  Or, really, paying ahead.

Now, for the fun part – retirement!  Yes, the government sees retirees just like little one-person small businesses. Unless the IRS sees a steady  stream of payments from you in retirement, you are also expected to pay quarterly taxes.

How might they see a regular tax stream?  Well, if you are having taxes withheld on Social Security, pensions, or annuity payments, you might be able to avoid quarterly payments.  Also, if you have money sent regularly from IRAs and are having taxes withheld by your brokerage firm, that will help.

If, however, your income is more lumpy work with an accountant to estimate your total tax liability each year and be sure to throw the IRS that quarterly bone.  Otherwise, you could end up paying late fees on taxes, even if you file and pay right on time.



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