As a W-2 employee, your employer withholds taxes from every paycheck, and you’ll file your taxes once a year in April. Pretty straightforward. Things are not quite so simple for small business owners, however. Because as a business owner, you’re required to pay estimated quarterly taxes.
Whether you’re using accounting software or are managing your payroll, taxes, and bookkeeping manually, it is essential to understand your quarterly tax responsibilities, including when taxes are due and how to estimate what you owe.
Who needs to pay estimated quarterly taxes?
According to the IRS, if you are one of the following, you may be required to pay quarterly taxes since an employer has not withheld the federal taxes for you.
- Sole proprietor
- Independent contractor or freelancer
- Business owner
- S corporation shareholder
- Partnership partner
If you fall into one of the above groups and owe more than $1,000 in taxes, you generally must file quarterly tax payments. Your payments must cover the following:
- Social Security tax
- Income tax on business profits
- Medicare tax
You may also be required to pay quarterly estimated state taxes depending on your state or the states you operate in.
Not every self-employed individual or business owner has to file quarterly tax returns. Exempt individuals include those who:
- Owe less than $1,000 when filing taxes
- Had zero tax liability the prior year
- Had a 12-month tax year the prior year
Other criteria include being a United States citizen or resident for the entire past year.
Talk to a tax professional for additional details and rules governing estimated taxes to ensure you comply with your federal and state tax obligations.
Calculating quarterly taxes
While paying taxes four times a year may seem like a headache, spreading out your payments may be easier than paying it all in one lump sum.
To determine how much you owe, use IRS Form 1040-ES, which has instructions and a worksheet with lines for adjusted gross income, credits, self-employment taxes, and other taxes. The form also includes the latest tax rate schedules. The IRS suggests using your previous year’s tax return as a guide to figuring out your income, deductions, and credits, keeping in mind any newly added rules for the current year.
When are quarterly estimated tax payments due?
Quarterly estimated tax payments due dates are as follows:
- April 15 – For payment period January 1 – March 31
- June 15 – For payment period April 1 – May 31
- September 15 – For payment period June 1 – August 31
- January 15 of the following year – For payment period September 1 – December 31
See the IRS website for further due date details.
How to make quarterly tax payments
There are several methods for making estimated tax payments:
- Electronically through the Electronic Federal Tax Payment System (EFTPS). This system allows you to schedule payments in advance, track your payment through email, view payment history, and change or cancel payments.
- Mail a check or money order with your IRS Form 1040-ES.
- Online at the IRS website. Pay from your bank account, debit card, credit card, or digital wallet. Fees apply when paying with a card or digital wallet.
Tax payment plans, such as an installment agreement, may be available to qualified businesses.
What happens if you don’t make the required estimated tax payments?
Failure to file or pay your estimated taxes by the due date will result in penalties. The minimum penalty is usually 5%—plus interest—of the unpaid taxes for each month or part of a month that the tax return is late.
Quarterly tax payment preparation strategies
Here are some tips to help you manage your quarterly tax responsibilities in stride.
Reduce your stress and frantic last-minute searches for important documents by staying organized throughout the year. Maintain accurate and up-to-date financial records, including your profits and losses, and expenses. If you use accounting software, leverage the receipt and expense tracker to import and sort expenses. You’ll have the documents you need when you need them, all conveniently stored in the platform and easily shareable with your accountant and other stakeholders.
Know your deductions
Lower your tax liability by claiming all the deductions you’re entitled to. As a business owner, you qualify for quite a few deductions, such as:
- Office supplies, phone, and internet expenses
- Business insurance
- Professional services, including accounting software
- Work-related travel expenses
Accounting software with expense categorization capabilities can help ensure that all your deductions are accounted for.
Consult a pro
Paying quarterly taxes accurately and on time may seem like a daunting task. Between federal and state requirements, keeping track of deductions, and staying abreast of the latest rules and regulations, there’s a lot you need to know. To give you peace of mind, you may want to consider working with a tax professional.
Whether you use accounting and invoice software for your recordkeeping, financial report generation, and accounts receivable tracking or manage it all manually, an accountant or other tax expert can help guide you through the tax process. Leave the legwork to the pros so that you can focus on other business priorities.
When you’re a small business, tax season lasts all year. And while taxes may not be the most enjoyable part of being your own boss, the right tax prep strategies can streamline and simplify the process. You’ll avoid unwelcome IRS surprises, stay compliant, and be ready to tackle your next big business opportunity.