Should you overpay quarterly taxes?

Many taxpayers wrestle with the decision of how much to pay in their quarterly taxes. Paying quarterly taxes ensures you meet your tax obligations in a timely manner, preventing large tax bills and penalties after filing your taxes. However, should you overpay your quarterly taxes just to avoid still owing at the end of the year? While overpaying quarterly payments might seem like a safe buffer, it’s important to weigh whether this extra cushion makes good financial sense. 

In which direction should you estimate?

Determining the right amount for estimated quarterly taxes can be tricky. You must balance between underpaying which could lead to penalties and overpaying which affects your cash flow. But that’s easier said than done.

If you’re self-employed, a small business owner, freelancer or independent contractor your income and expenses may fluctuate during the year. You might be having a profitable year and need to increase your quarterly payments, or maybe you’re in a seasonal slump and owe less.

So, should you overpay? And is there a downside? Yes, by overpaying you’re essentially giving the IRS an interest-free loan for months. That’s why it’s important to estimate your earnings as accurately as possible. 

The good news? A qualified CPA can help you calculate an accurate amount based on your income, tax bracket and possible deductions. The IRS provides online payment options or mail-in vouchers. But your CPA can guide you on when to pay and how to pay, ensure payments match your actual tax liability.

It could cost you

Why is overpaying quarterly taxes considered an interest-free loan? Because the IRS holds onto the money until you file your tax return, and during this period, your money earns no interest. Essentially, you’re giving the government free money. 

Are there any other drawbacks? The emotional satisfaction of receiving a large tax refund can overshadow the reality you had less money to invest or use throughout the year. Thus, while overpaying can prevent a year-end tax bill, it also means losing access to those funds when you might need them. Overpaying your quarterly payments has its downsides, but what about overpaying all year round? Tax returns aren’t always a bonus. Read all about the downside of receiving a tax refund in our latest blog.