Paying quarterly taxes is about more than to avoiding a surprise at the end of the year.
By Megan Arszman
Horse professionals, like many self-employed individuals or business owners, have a lot on their plates. We’ll save you the time of reading through the short list of things you have to do today, alone, but one of the biggest things is running your business—and ensuring that business is being ran legally, so you avoid any unnecessary trouble with the United States government.
What would be one of the most important things to ensure that your business is on the up-and-up? Being cognizant of tax laws and understanding the need to pay your taxes on a quarterly basis.
But why should you pay quarterly? Here are five simple reasons to stay on top of your taxes.
Income Instability: We’re not telling you anything new when we say that horse trainers often experience fluctuations in income throughout the year, depending on factors like the show season, sales, and training contracts. Quarterly tax payments help ensure that you meet your obligations in a timely manner, even if your income varies.
Self-Employment Taxes: When you operate as a self-employed individual or an independent contractor, you are responsible for paying both income taxes and self-employment taxes. These taxes cover Social Security and Medicare contributions, which are usually withheld from employee paychecks. Paying quarterly estimates helps you keep up with these obligations.
Smoother Financial Planning: Financial planning is definitely not as fun as show season planning, but it is important for professionals. By paying your taxes quarterly, you can better manage your cash flow, thus making financial planning easier. Instead of facing a large tax bill at the end of the year, spreading out your tax payments over four quarters can help with budgeting.
Legal Requirements: Tax laws vary by jurisdiction, but there may be a requirement for individuals with a certain level of income to pay taxes on a quarterly basis. Because of tax agency requirements, failing to comply with these regulations can mean that you incur a penalty if you underpay or do not pay.
Avoid Year-End Surprises: Receiving a rather large tax bill at the end of the year is definitely not as exciting as finding out you finished as the No. 1 NRHA Professional at the end of the year. Making quarterly tax payments helps you stay informed about your tax liabilities throughout the year, thus preventing you from being surprised by a significant tax bill at the end of the year.
“The biggest thing with quarterly taxes is that they should be paid on time,” says Sarah Ellis, partner at W/E CPA in Westfield, Indiana.
Consult a tax professional or an accountant who is familiar with tax regulations in your state and as a self-employed professional. A financial professional can help you determine whether you are required to make quarterly tax payments while estimating your tax liability and ensuring that you are meeting all the obligations in a timely manner.
Do I Always Have to Pay Quarterly?
According to Ellis, you may not have to pay every quarter. It all depends on your earnings on a quarter-by-quarter basis.
“If you don’t make a lot of money the first or second quarter, it’s possible you only need to make a quarterly payment once or twice a year, depending on your earnings level,” she says.
You should send tax payments in terms of the quarter that you earn that money. Don’t really earn much of a check until you nailed a top score at the All American Quarter Horse Congress? Send in your quarterly payment for the fourth quarter based on your earnings in that quarter.
“That’s why there are quarterly taxes—the government wants the money when you earn it,” Ellis says.
IRS CIRCULAR 230 DISCLOSURE: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing, or recommending to another person any tax-related matter. The above material has been presented in a significantly simplified format. Do not attempt to begin action on any of the above matters without first consulting your tax advisor.
