Taxes are often a dreaded part of running a small business. Many entrepreneurs and small business owners do not have income taxes withheld automatically from wages the way that a W-2 employee does. Instead, you may be responsible for calculating and paying your own income taxes. If that is the case, you are required by the Internal Revenue Service (IRS) to pay income taxes on a quarterly basis (known as quarterly estimated taxes). It is critical to understand your estimated quarterly tax obligation and comply with relevant guidelines established by the IRS.
In this blog, we highlight essential points to help you understand estimated quarterly taxes including what they are, how to calculate what you owe, when to pay them and how to pay them.
What are Quarterly Taxes
Quarterly taxes are estimated tax payments to the IRS that you pay throughout the year on income for which taxes were not automatically withheld. These payments include income tax, Social Security and Medicare.
Unlike employees who have taxes withheld from their paycheck by an employer, small business owners (if they are not W-2 employees) are responsible for paying these taxes to the IRS directly via estimated quarterly tax payments. Estimated quarterly taxes are based on an estimate of taxable income for each business quarter, so business owners still have to file an annual tax return just like W-2 employees.
By making estimated tax payments throughout the year, instead of one lump-sum at the end of the year, you can better manage cash flow and avoid underpayment penalties.
Understanding What You Owe
Most small business owners including sole proprietors, partners, and S corporation shareholders must make estimated quarterly payments if they expect to owe taxes of $1,000 or more. You may also need to file and pay quarterly taxes if you owe taxes from a prior year.
The amount of your quarterly tax payment is based on your income. You can calculate your estimated taxes using the worksheet on IRS Form 1040-ES. The worksheet includes expected adjusted gross income, taxable income, taxes, deductions and credits for the year. It is helpful to utilize your prior year income, deductions and credits as a reference point.
Accuracy counts. Strive to estimate your income with precision to avoid penalties. If your estimate is too high or too low, complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter.
When To Pay Quarterly Taxes
Quarterly taxes are divided into four payment periods, each with a specific payment due date. Paying your estimated taxes on time is important to avoid a late payment penalty. Note that the IRS can charge a penalty for missing a payment deadline and for not paying enough tax for a quarterly payment, even if you are due a refund when you file your annual income tax return.
The dates for paying quarterly taxes in 2023 are:
- April 18, 2023: Taxes due on earnings from January 1 – March 31
- June 15, 2023: Taxes due on earnings from April 1 – May 31
- September 15, 2023: Taxes due on earnings from June 1 – August 31
- January 15, 2024: Taxes due on earnings from September 1 – December 31 or for the full year ahead
If a payment is mailed, the date of the U.S. postmark is the date of payment. If the due date for an estimated tax payment falls on a Saturday, Sunday or legal holiday, the payment will be on time if you make it on the next day that isn’t a Saturday, Sunday or holiday.
How To Pay Quarterly Taxes
The process for filing and paying estimated quarterly taxes is similar to filing an annual tax return. The IRS offers multiple ways for small business owners and entrepreneurs to pay their estimated tax payments. You can:
- Mail your estimated tax payments with Form 1040-ES
- Pay online from your bank account, credit card or digital wallet, by phone or from your mobile device using the IRS2Go app
- Establish an online account, where you can also see your payment history and other tax records
- Utilize the Electronic Federal Tax Payment System (EFTPS)
Visit IRS.gov to view all the payment options. For additional information, refer to IRS Publication 505, Tax Withholding and Estimated Tax. For businesses that need more time to pay quarterly taxes, the IRS has payment plan options. Avoid a late penalty by filing and paying your tax by the due date, even if you can’t entirely pay what you owe.
Get Connected Today
With planning and assistance from seasoned professionals at Gift CPAs, quarterly taxes can be a manageable part of running your business. Contact Gift CPAs for more information on our full scope of accounting and business services. We have years of experience working with small businesses to help with bookkeeping, taxes and other business needs. Make an appointment to meet virtually or at one of our five locations in Harrisburg, Mechanicsburg, Myerstown, Ephrata or Lancaster!