As a business owner or entrepreneur, paying taxes and the often-dreaded tax season is unavoidable. While we can’t simply ignore these business requirements, they can feel a bit more manageable and easy to keep up with when done in pieces: cue, quarterly estimated taxes.
Your familiarity with quarterly taxes depends on the size of your business and how much you usually owe each year. Following IRS requirements, most small business owners must make estimated quarterly payments if they expect to owe taxes of $1,000 or more.
What is included in quarterly taxes?
Estimated quarterly tax payments include income taxes and self-employment taxes. Generally, as a self-employed individual, you must file an annual return and pay these estimated quarterly taxes.
Before determining if you must make self-employment tax and income tax payments, you need to figure out your profit or loss from your business. To do so, you can subtract your business expenses from your business income. If your costs are less than your income, the difference is net profit. If your expenses are more than your income, the difference is then a net loss.
If your net earnings from your self-employed position were $400 or more, you need to file an income tax return . If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 and 1040-SR instructions PDF.
Why pay quarterly taxes?
Aside from the IRS telling you to, there are advantages to paying taxes quarterly instead of just once a year. Paying quarterly tax payments will help you avoid problems when tax time rolls around.
Taxes are pay-as-you-go, meaning that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.
Paying quarterly taxes can help you:
- Avoid paying interest or the Estimated Tax Penalty for paying too little tax during the year
- Ensures you have the money set aside to make payments instead of one lump sum payment come tax deadline time
- Lessen the stress and pressure of filing your taxes in the spring by spreading out payments quarterly
How to calculate and pay in what you owe
For many businesses, tools like Quickbooks and outsourced accounting partners can help manage quarterly taxes for you. While it’s essential to keep up with them, quarterly taxes are just an estimate, so you’ll still want to budget some time and extra money for the annual filing deadline each spring.
Estimated tax is the method used to pay Social Security taxes, Medicare taxes, and income tax since you do not have an employer withholding these taxes for you. You can use Form 1040-ES, Estimated Tax for Individuals PDF to figure these taxes. You will need your prior year’s annual tax return in order to fill out Form 1040-ES.
Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments, or you may make your payments using the Electronic Federal Tax Payment System or something similar such as Quickbooks.
If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year.
See the Estimated Taxes page for more information. The Self-Employment Tax page has more information on Social Security and Medicare taxes.
Dates and deadlines
Here are the dates for estimated tax filings each year:
- January 1 to March 31 – due by April 15
- April 1 to May 31 – due by June 15
- June 1 to August 31 – due by September 15
- September 1 to December 31 – due by January 15 of the following year
It’s important to note, if any of these due dates fall on a Saturday, Sunday, or legal holiday, the payments are not due until the following business day. Additionally, some states and local municipalities also have quarterly estimated tax rules. Check with your professional tax advisor in order to make sure you are in compliance and avoid their penalties for tax payment shortages.
If you need help with annual or quarterly taxes, be sure to talk to a tax professional like Gift CPA. Tax planning is always an ongoing process, and we can help you make accurate estimated payments and file your annual return. Contact our team today to learn more about how we can help your business.