Self-Employment

If you, or your spouse, are self-employed, then filing quarterly estimated taxes is a very good idea. This applies to freelancers like writers and graphic designers as well. Typically, clients do not take taxes out of what they pay you, so at the end of the year when you file you could end up owing the IRS a lot of money. If you pay estimated taxes throughout the course of the year, you won’t be hit out of nowhere with a huge tax bill.

The Nanny Tax

If you pay someone more than $1,800 per year (as of tax year 2012), to take care of your children in your home then you have to pay taxes on that. The Nanny Tax is the equivalent of FICA taxes that employers pay. If the caregiver is a parent, spouse and or someone whose primary occupation is not household employment, then you are exempt. If you want to avoid potentially owing interest, it is a good idea to pay quarterly.

Extra Income

Say you cash in on a hot stock or you won big on Jeopardy. Whatever the case, if you have a large amount of extra income that is not listed on your W4 you should consider paying estimated taxes. There are separate rules for inheritances and gifts, so you should consult with a tax professional to determine if you need to pay ahead on your taxes based on the source of the extra income.

You Always Owe Taxes

If you seem to end up owing taxes every year, making quarterly tax payments throughout the year will at least take some of the sting out of it. However, the IRS has certain guidelines about the amounts you can pay and the requirement threshold, whether you end up paying right away or have to file an IRS tax extension each year. If you are not sure if you qualify, you can check the IRS’s website at www.irs.gov to find out. If you cannot find the right information on the website, ask whoever prepares your taxes if it is a possibility.

Other Forms of “Income”

Most people do not realize it, but there are things the IRS considers income that most people do not think of. For example, if you have a car that was repossessed and the company writes off your debt after the sale that is considered income. If you cash in a 401k early, you may own taxes in addition to the penalties. Student scholarships count as income too. If you are in any situation where you have additional income – earned or unearned – filing quarterly taxes may be a good idea.

No one wants to deal with the IRS, but it is part of life. The quarterly estimated tax system may not seem like a headache, but it is actually a relief system for taxpayers. If you can make quarterly payments instead of owing a lump sum all at once that you can’t pay, you will save yourself a lot of trouble negotiating with the IRS to pay your tax debt.

About the Author: Quinton Joice is a personal finance consultant who recommends everyone pay close attention to their income and expenses throughout the year; not just at the end of the year.