Investing: Is It Worth Paying 900 Every Quarter?

Whether or not it makes sense to pay $900 quarterly for investing depends on a variety of factors, including your income, business structure, investments, and more. If you are self-employed or have other investment income, you may need to pay your taxes quarterly to compensate for not having taxes withheld from your paychecks like traditional employees. Generally, if you expect to owe $1,000 or more in taxes when your return is filed, you should consider making quarterly estimated tax payments to avoid underpayment penalties and interest. However, the decision to pay quarterly or annually is not always clear-cut, and it is recommended to consult a tax advisor to determine the best approach for your specific situation.

Self-employed people need to make quarterly tax payments

Self-employed people are generally required to file an annual income tax return and pay estimated taxes quarterly. This is because, unlike regular employees, self-employed people do not have an employer withholding these taxes for them.

Self-employed individuals generally must pay self-employment (SE) tax as well as income tax. SE tax is a Social Security and Medicare tax, similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.

The IRS uses a pay-as-you-go income tax system, meaning you must pay your taxes as you earn income. It enforces this by charging penalties for underpayment. You will be penalised if you haven't paid enough income taxes through withholding or making quarterly payments. The IRS also charges penalties on late payments, even if you end up getting a refund.

The IRS uses a couple of rules to determine if you need to make quarterly estimated tax payments:

• You expect to owe more than $1,000 after subtracting withholding and tax credits when filing your return
• You expect your withholding and tax credits to be less than: 90% of your estimated tax liability for the current tax year or 100% of the previous year's tax liability, assuming it covers all 12 months of the calendar year.

There is an exception for individuals who earn at least two-thirds of their income from farming or fishing. The requirement is to pay in two-thirds of your current year's tax or 100% of your prior year's tax. There is only one estimated tax payment date of January 15 of the following year. Additionally, if you file and pay in full by March 1, then estimated tax payments are not required.

You can submit your quarterly taxes online through the Electronic Federal Tax Payment System or pay using paper forms supplied by the IRS.

Estimated tax payments are based on prior-year income and credits

The amount of estimated tax you pay is based on your income and credits from the previous year. The IRS requires you to make estimated tax payments for the current tax year if the following apply:

• You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits
• You expect your withholding and refundable credits to be less than the smaller of: 90% of the tax shown on your current year's tax return, or 100% of the tax shown on your prior year's tax return.

If you are a freelancer, self-employed, or a business owner, you will likely need to pay quarterly taxes. If you are a W-2 worker, you may also need to pay estimated taxes if your tax liability is not fully covered by your withholdings.

You can use Form 1040-ES to estimate your tax liability and make payments to the IRS. If you overestimate or underestimate your earnings, you can complete another Form 1040-ES to adjust your estimated tax for the next quarter.

You can avoid a penalty by paying 90-110% of last year's tax liability

The Internal Revenue Service (IRS) requires taxpayers to pay their taxes throughout the year as they receive income. This is known as the "pay-as-you-go" system. If you don't pay enough of your estimated taxes during the year, don't have enough withheld from your wages, or pay late, you may be subject to an underpayment penalty.

To avoid an underpayment penalty, you must generally pay at least 90% of your taxes from the previous year. This is especially important if you expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits.

• Your filed tax return shows you owe less than $1,000.
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less. If your adjusted gross income (AGI) for 2023 was more than $150,000 ($75,000 if your filing status for 2024 is married filing separately), you must pay 110% of the previous year's tax instead of 100%.

It's important to note that the IRS may waive or reduce the underpayment penalty in certain circumstances, such as a serious illness, family member's death, natural disaster, or other reasonable causes.

Quarterly payments help to avoid a huge tax bill later in the year

If you're self-employed or have other investment income, you may have to pay your taxes quarterly to compensate for not having taxes withheld by an employer throughout the year. This is known as the "pay-as-you-go" system.

The IRS says you should make estimated quarterly payments if you expect to owe at least $1,000 in federal taxes when your tax return is filed. If you don't make these payments and you're supposed to, you'll have to pay an underpayment penalty on your unpaid taxes.

By making quarterly payments, you can avoid a huge tax bill later in the year. This can be a huge burden, depending on your budget and business. Instead of paying a large sum at the end of the year, you can spread out the cost over the year.

If you expect to owe more than $1,000 in taxes, you can follow the safe harbor rule and pay 100% of your tax balance from the previous year. This way, even if you still owe some tax, you won't have to pay a penalty. The IRS will refund any overpayment or let you apply it to the next tax year.

It's important to note that the decision to make quarterly payments depends on various factors, including your income, business structure, and investments. Consult a tax advisor to determine the best approach for your situation.

You may need to pay estimated taxes on side hustles

If you have a side hustle, you are considered self-employed by the IRS. This means you need to report and pay taxes on this income stream, and you may need to pay estimated taxes on it.

The IRS requires you to make estimated tax payments for the current tax year if you expect to owe at least $1,000 in tax for that year after subtracting your withholding and refundable credits, and if your withholding and refundable credits are less than the smaller amount of either 90% of the tax to be shown on your current year's tax return or 100% of the tax shown on your prior year's tax return.

If you need to pay estimated taxes, you have two options:

• Divide the total tax you expect to owe when you file your tax return into four equal payments and pay the estimated taxes when they are due.
• Adjust your tax withholding at your normal job by filling out a new W-4 form to account for the taxes you'll owe on your side hustle income.

If you don't pay your estimated taxes on time, the IRS will charge you a penalty.

To make it easier to keep track of your side hustle income and expenses, you should open a separate bank account dedicated to your side hustle. This will also make it easier to find business expenses and calculate how much you spent on your side gig throughout the year.

Frequently asked questions