Nothing’s more thrilling than embarking on a new small business adventure and succeeding. But with new company milestones come more complicated finances.
Tracking the right tax documents throughout the year is only the start. Not only do you need to finagle those taxes in April—you may be better served (and legally compelled) to pay your taxes quarterly.
In this blog, we’ll break down what quarterly taxes are, whether or not you’re required to pay them, and exactly how to do so properly.
What are Quarterly Taxes?
Quarterly taxes are estimated tax payments you make to the IRS in four installments per year instead of one big annual payment. The deadlines for quarterly tax payments generally fall on April 15, June 15, September 15, and January 15 (of the next year).These payments cover your tax liability for the current year, and are calculated based on your projected earnings and deductions.
Who is Required to Submit Quarterly Tax Returns?
The IRS requires estimated quarterly tax payments if you’re a:
- Self-employed individual whose income generally comes from 1099’s where federal income tax is not withheld, who expects to pay over $1,000 in taxes
- Small business of any kind (including partnerships, sole proprietorships, and S corporations) who expects to pay over $1,000 in taxes
- Corporation who expect to owe $500+ when their return is filed
If you anticipate that your business will owe the IRS a significant amount at the end of the year, it will generally benefit you (and help you avoid penalties) to estimate and pay quarterly taxes.
How to Estimate the Amount You Owe
There are two ways to estimate the amount of quarterly taxes you owe:
- Calculate your business’s yearly estimated income and deductions. Figure out the taxes you’ll owe annually and then divide that figure into four even payments. This is a method that works best when you receive income fairly evenly throughout the year.
- Calculate what you owe each quarter as it comes, based on what your company has actually earned and spent during that portion of the year. If you don’t receive income evenly throughout a calendar year, this is a better bet for accurate calculations.
When estimating taxes for the whole year, you run the risk of over- or under-paying on your quarterly tax payments due to unforeseen changes in revenue or expenditures. This isn’t a huge issue though, as you can usually correct misjudged estimations in the next quarter’s payment.
While calculating what you owe each quarter as it comes is generally more accurate, it also demands you spend more time on tax prep over the course of the year. Ultimately, both methods are valid and viable. Choose whichever makes the most sense to your business (and to your brain.)
Just as with annual tax payments, you will have to deal with both federal and state tax payments quarterly.
Your federal taxes will depend on your business structure. Are you an LLC or sole proprietor? Then your federal estimated taxes will usually include a self-employment tax. This isn’t the case if your business is a C corporation. C Corporations (or LLCs taxed as C Corporations) don’t pay self-employment taxes, but instead pay the employee portion of Social Security and Medicare taxes.
The IRS offers helpful resources for understanding what Federal taxes you owe, including a Self Employment Tax Guide, a publication on starting a business and keeping records, and a Tax Guide for Small Businesses.
Paying federal taxes is only half the battle; you’ll also typically need to pay quarterly estimated taxes in one or more states. These state taxes may include sales and use taxes, state and local income or franchise taxes, and employment taxes. These taxes vary, of course, by what state(s) your business operates in.
Start by identifying what state or local income taxes affect your business. This will depend on where you conduct your business. If you’re located and only operate out of one state, you’ll only owe taxes in that state.
However, if you store inventory, employ workers, or conduct business throughout the country, you may need to file in more than one state. Learn the tax requirements of your state(s) and be sure to account for them in your quarterly payments.
How to Pay Your Estimated Quarterly Taxes?
You can pay your federal quarterly taxes online or by mail. Most states also offer an online option for payment. Make sure to plan ahead and have enough funds on hand to make your quarterly payments on time. You can consult the IRS tax calendar to stay on top of critical deadlines and ensure you are sending your payments to the right place.
Individuals will want to use IRS Form 1040-ES, while corporations should use Form 1120-W. You can also connect your bank account to the Electronic Federal Tax Payment System for a direct and simple payment procedure.
What Happens if You Make a Mistake?
If you find out that you should have paid quarterly taxes and didn’t, you may have to pay penalties to the IRS. Yikes! Penalties are calculated separately for each mandatory payment: the number of days past the payment deadline is multiplied by the effective interest rate for that payment period. Generally, this ends up being a penalty of about .5% of the amount owed each month.
That’s why it’s better to figure this stuff out now, rather than wait for tax season to roll around again.
Payments that are made on time but with inaccurate estimates are usually granted more leniency. If the total of your estimated quarterly payments for a year add up to at least 90% of your actual tax total, you’re unlikely to get penalized.
Avoid Quarterly Tax Confusion with a Reliable Accountant!
All in all, it’s best to avoid finance mistakes entirely. And the easiest way to do that is by partnering with an excellent accounting service. Know Your Numbers Accounting helps small businesses keep their books on track and error-free. Interested in taking the stress out of tax season? Schedule a consultation today!
Got any pressing questions about tax season as a small business owner? Let us know in the comments below!