As a small business owner, understanding your tax obligations is crucial to your financial success.
While annual taxes are a well-known responsibility, quarterly taxes can sometimes come as a surprise. In this guide, we’ll cover everything you need to know about quarterly taxes, including who needs to pay them, how to calculate them, and important deadlines to keep in mind.
What Are Quarterly Taxes?
Quarterly taxes are estimated tax payments made by self-employed individuals and small business owners to the Internal Revenue Service (IRS) four times a year. These payments are made to cover the individual’s or business’s income tax liability, as well as self-employment tax, which includes Social Security and Medicare taxes.
“Small business owners and self-employed individuals are not subject to withholding taxes like employees are,” explained Alia Bedi, General Manager of L’Evate You. “Withholding taxes are amounts taken out of an employee’s paycheck by their employer to cover their federal and state tax liabilities. Self-employed individuals and small business owners are responsible for calculating their own tax liability and making estimated tax payments throughout the year.”
This helps ensure that taxpayers are meeting their tax obligations in a timely manner, and it also helps the government manage its cash flow more effectively.
Who Needs To Pay Quarterly Taxes?
If you are self-employed or own a small business, you may need to pay quarterly taxes if you expect to owe at least $1,000 in federal income tax for the year. This requirement also applies if you were required to pay taxes in the previous year.
“Quarterly taxes are typically paid by sole proprietors, partners in partnerships, and S corporation shareholders who have not elected to have their corporation treated as a C corporation for tax purposes,” said George Fraguio, Vice President of Bridge Lending at Vaster Capital. “If your business is a C corporation, you do not need to pay quarterly taxes.”
If your income is primarily from a salary and you don’t have significant additional income from sources such as investments, rental properties, or self-employment, you may not need to make quarterly tax payments. However, if you have significant additional income that is not subject to withholding, you may need to make estimated tax payments.
Regular Installment Method
The regular installment method is the most straightforward way to calculate your quarterly taxes. With this method, you simply take your estimated annual income, subtract your deductions and exemptions, and calculate your tax liability. You then divide this number by four to determine your quarterly payment.
“For example, if you expect to earn $80,000 in income this year and have $20,000 in deductions and exemptions, your taxable income would be $60,000,” said Darren Carvalho, Co-Founder of MetaWealth. “Using the tax brackets for the 2023 tax year, your estimated tax liability would be approximately $10,271. Dividing this number by four, your quarterly payment would be $2,568.”
Making regular installments can help you avoid underpayment penalties and help you better manage your cash flow by spreading out your tax payments throughout the year.
Annualized Income Installment Method
The annualized income installment method is more complex than the regular installment method but can be useful if your income is not evenly distributed throughout the year. With this method, you calculate your tax liability based on your income for each quarter rather than your estimated annual income.
“Estimate your income for each payment period based on your expected earnings,” said Max Baecker, President of American Hartford Gold, a company that helps individuals plan for retirement with Gold IRA accounts. “Keep in mind that your income may vary from period to period, so you may need to adjust your estimated income accordingly. You can choose to make annualized income installments on a quarterly basis or on a different payment schedule that is more in line with your income fluctuations. Be sure to consult the IRS guidelines for payment due dates.”
To use this method, you will need to complete Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts). This form allows you to calculate your estimated tax payments based on the income you earned in each quarter.
Keep Accurate Records
To accurately calculate your quarterly tax payments, you will need to keep accurate records of your income, expenses, and deductions. This will allow you to estimate your tax liability and avoid underpayment penalties.
“Keep all relevant documents, including receipts, invoices, bank statements, and tax forms,” Asker A Ahmed, Director of iProcess Global Research recommended. “Organize these documents by tax year and keep them in a safe and secure location. Make sure to track all sources of income and expenses throughout the year. This includes income from self-employment, investment income, and any other sources of income.”
If you are a small business owner, it is important to separate your business and personal expenses. This will help you accurately track your business expenses and deductions.
Use Tax Software or an Accountant
Calculating quarterly taxes can be a complex process, especially if you have multiple sources of income or deductions. Consider using tax software or hiring an accountant to help you calculate your payments and stay on top of your tax obligations.
“Tax software is generally less expensive than hiring an accountant,” Shaunak Amin, CEO and Co-Founder of SwagMagic said. “Most tax software is designed to be user-friendly and easy to navigate. Tax software can save you time by automating calculations and filling out forms for you. However, an accountant can provide personalized advice and recommendations based on your specific financial situation.”
Ultimately, the decision between tax software and an accountant depends on your personal preferences and financial situation.
Set Aside Money for Taxes
One of the biggest challenges of paying quarterly taxes is ensuring that you have enough money set aside to make your payments on time. To avoid scrambling for funds when your payment is due, consider setting aside a portion of your income each month to cover your tax payments.
“Set up a separate bank account specifically for your tax payments,” suggested Marcus Hutsen, Business Development Manager at Patriot Coolers. This will help you keep your tax money separate from your other funds and avoid spending it accidentally. Set up automatic transfers from your business account to your tax account each time you receive income. This will help you consistently set aside money for taxes and avoid the temptation to spend it on other expenses.”
Stay Organized
Keeping organized records and staying on top of deadlines is key to avoiding underpayment penalties and interest charges. Consider setting up reminders for yourself or using a tax filing system to keep track of your payments and deadlines.
“Set aside time each week or month to review and update your financial records,” said Andrew Mavis, CEO of 98Strong. “This will help you stay on top of your finances and avoid falling behind on recordkeeping. If you have an accountant, meet with them more regularly to see exactly what’s going on. The key is to stay proactive and engaged year-round.”
Avoid the stress of scrambling to get your finances in order at tax time. Good recordkeeping and planning ahead can help you save time and money and ensure that you stay in compliance with tax laws and regulations.
Consider Making Additional Payments
If you expect to earn more income in one quarter than in others, consider making an additional payment to cover your tax liability. This can help you avoid underpayment penalties and interest charges and may also help you better manage your cash flow throughout the year.
“By spreading out your tax payments, you can avoid a large lump sum payment at the end of the year, which can be difficult to manage for small business owners with fluctuating income,” said Anthony Tivnan, CCO of Magellan Jets, a company that offers premier private jet charter flights. “To make an additional payment, you will need to use Form 1040-ES (Estimated Tax for Individuals) and pay online or by mail. The deadline for making additional payments is the same as the quarterly tax payment deadlines.”
When making an additional payment, be sure to indicate on Form 1040-ES that you are making an additional payment and include the payment with your estimated tax payment for the current quarter. If you make an additional payment, you may need to adjust your future quarterly payments to account for the additional payment you made.
Penalties for Late or Underpaid Quarterly Taxes
If you fail to make your quarterly tax payments on time or underpay your estimated tax liability, you may be subject to penalties and interest charges. This is certain to make your business goals harder to reach.
“The penalty for underpayment of estimated tax is calculated based on the difference between the amount you were required to pay and the amount you actually paid,” said Seth Besse, CEO of Undivided. “The penalty is calculated separately for each payment due date. To avoid underpayment penalties, you must pay either 90% of your current year’s tax liability or 100% of your previous year’s tax liability (110% if your adjusted gross income was over $150,000).”
If you miss a quarterly tax payment, the penalty is calculated at a rate of 0.5% per month on the amount of tax owed. This penalty can increase to 1% per month if your payment is more than 60 days late.
Don’t Sweat Tax Season for Your Business
Paying quarterly taxes can be a challenge for small business owners and self-employed individuals, but understanding your obligations and staying organized can help you avoid penalties and interest charges.
Keep accurate records, consider using tax software or hiring an accountant, and set aside money each month to cover your tax payments. By following these tips and staying on top of your tax obligations, you can ensure your financial success as a small business owner.
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