Many clients ask if it is more advantageous to pay quarterly tax estimates or utilize their tax withholding. I wish there were a simple, cookie-cutter answer. However, as no two taxpayers are alike, the same goes for the manner in which one can pay one’s taxes.
Both methods of paying income tax have their pros and cons. The best selection depends on your personal preference and, more so, financial situation. A majority of self-employed individuals must utilize quarterly payments. However, if you have an income source such as retirement distributions, social security or employee wages, you have the option of withholding tax from those income streams in lieu of paying quarterly.
Related read: 10 Simple Things You Can Do Right Now to Reduce Your Taxes
Which is right for you?
Paying Quarterly Estimated Tax Payments (Required for self-employed individuals with no other sources of income):
- More cash on hand throughout the year
- Easier to adjust for unforeseen substantial financial changes
- Greater chance of penalties and interest for underpayments
- Remembering to pay quarterly and actually cut the checks on time
- Not viewed by the government as paid evenly throughout the year
- Less chance of penalties and interest for underpayments
- Low maintenance (set it and forget it)
- Viewed by the government as paid evenly throughout the year, regardless of when actually withheld
- Less cash on hand throughout the year
- More difficult to adjust for unforeseen substantial financial changes
Regardless of which method you choose, the required tax payments for each tax year must equal the lessor of:
- 90% of your current year tax liability OR
- 100% of your prior year tax liability in order to avoid penalties and interest. Note that individuals with Adjusted Gross Income (AGI) greater than $150,000 must cover 110%, rather than 100%
As you have probably learned, tax planning can become quite complex. You should discuss appropriate tax planning and strategies with your tax professional throughout the year. If you have questions about this article or how we help businesses and individuals reduce their tax obligations, contact me at [email protected] or any of the Zinner & Co. professionals at 216.831.9733. We are happy to help and ready to start the conversation.