Three Reasons Why Quarterly Income Tax Payments Make Good Sense
Wondering why you should send your hard earned cash to the IRS every quarter instead of tucking it away until you file your tax return? If so, then you’re not alone.
Some business owners believe it’s more beneficial to pay one lump sum when filing, which allows them to use more of their cash as needed throughout the year. While logical on the surface, this may not be the best approach. In my experience working with plenty of small businesses and seeing the impact of both the lump-sum and quarterly payment approach, these are the top three reasons why paying estimated taxes on a quarterly basis could prove smarter for your business.
Manage your cash flow. While waiting until tax day to pay a lump sum seems like a way to utilize your cash in the short term, paying quarterly is actually better for your cash flow. Payments are more frequent and smaller rather than a significant cash drain that hits all at once during tax time. Including quarterly payments as part of your annual profit plan allows you to know what’s ahead, and keep your cash flow more consistent all year long.
Avoid penalties. If you owe taxes and don’t pay them on-time, get ready to (literally) pay the penalty. Depending on your tax situation and how much you owe, you’ll be assessed penalties for non- and/or late payment(s). The penalty can be as much as 5% for each month the payment is late (not exceeding 25% of total payment due). You can even be penalized for underpayment of estimated taxes that you pay on-time. The best way to avoid penalties is to work with a tax professional who can help you determine accurate quarterly payment amounts.
Enjoy peace of mind. Paying quarterly means you’re more likely to have the cash to make a payment. Even with a bank account set aside specifically for tax savings, it’s easy to dip into those funds to cover more urgent expenses as they arise. Chipping away at what you owe throughout the year means less day-to-day worry and stress, and an especially lighter weight on your shoulders come tax time. Knowing you’re close, if not spot-on, to having paid your share of taxes for the year — no matter what time of year it is — is a very, very good feeling. And that, friends, is priceless.
Quarterly Tax Tips
To make your next quarterly payment, check out the video below for step by step instructions.
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