Can Filing Taxes Quarterly Save Money?

Tom Streissguth, Demand Media writes: The IRS requires the self-employed, and individuals with high non-wage income, to pay quarterly estimated taxes. The amount depends on what you estimate your tax liability to be for the year. Strictly speaking, this is not a tax filing. Instead, it's a deposit on your tax bill to the IRS. If you estimate the deposit accurately, and pay it on time, then you avoid IRS penalties, as well as the inconvenience of writing a big check to the agency when you file your return.

TAX BILLS

Estimated tax is a task for the self-employed, as well as people who earn a substantial amount from interest, dividends, rent, capital gains, alimony or prizes. The amount of tax you owe depends on how much you make. The date on which you pay taxes doesn't change the tax liability, and there is no savings on the tax bill, or change in the tax rates, for people who pay estimated taxes. On April 15, the tax for the previous year comes due in full, along with your tax return. If you pay late, you pay more.

UNDERPAYMENT AND PENALTIES

Estimated tax payments are due in April, June, September and January. They are just a less-frequent form of withholding. In both cases, you pay your tax bill as you earn money. If your estimated quarterly payment, or withholding, is too low, then you might pay interest -- which the IRS calls a penalty -- on the amount by which you underpaid. In 2012, this rate was fixed at 5 percent. The IRS provides a form for you to figure out the penalty on your return. If you prefer, you can let the agency calculate the penalty and send you a bill.

OTHER WAYS TO PAY

You can also save time and postage, and the dangers of a bounced check, by paying estimated taxes online. The IRS requires a valid debit or credit card, or an open bank account that can be used for a direct transfer. You can also carry this out by calling the IRS and providing the information over the phone; however, phone calls to the IRS can involve long hold times. You can also use one of several third-party vendors, including Official Payments Corporation, WorldPay and Link2Gov Corporation. They charge a fee for the service.

SELF-EMPLOYMENT TAXES

For the self-employed, estimated taxes include the amount owed for self-employment taxes. SE tax is for income you earn, on which you need to pay a full share of Social Security and Medicare tax. With a conventional paycheck, these "payroll" taxes are split 50/50 between employer and employee. Estimated tax payments provide no discount on payroll tax, or any change in the rate you'll pay on other income such as capital gains, gift or estate tax.