There are a lot of upsides to being a small business owner–fun, flexibility, the chance to pocket your profits. But there are also downsides, and one of those is that you (unlike your neighbor with the plain ol’ W-2 job) get to deal with Uncle Sam multiple times per year for fun things like quarterly tax payments.
What are quarterly estimated taxes?
The U.S. is a pay-as-you-go tax system. This is why, when you worked for an employer, you probably noticed that they probably took taxes out of every paycheck. The problem is, when you’re self-employed, you no longer have an employer to take the taxes out of your check, but Uncle Sam (and, if you live in a state with an income tax, your state’s taxing authority) still want their money.
Because of this, the government asks that small business owners pay quarterly tax payments four times a year.
Quarterly Tax Payment Due Dates:
1st Quarter: April 15th
2nd Quarter: June 15th
3rd Quarter: September 15th
4th Quarter: January 15th
How much do I owe for my quarterly tax payments?
Ideally you will pay, throughout the year, the exact amount in taxes you will ultimately owe on April 15th. Of course, exactly how much profit you will make is almost impossible to determine, so that’s why these are “estimated” taxes.
First off, if you don’t expect that you will owe more than $1,000 in taxes in April, then you don’t have to make quarterly tax payments. This may occur because your business isn’t profitable yet, or because you or your spouse also have taxes withheld from a W-2 job which covers your tax burden.
The IRS provides form 1040-ES to help you figure out just exactly how much you owe each quarter. Don’t worry if you’re a little off – you’ll either have to pay a little more or a little less at the end of the year. If you pay far too little, though, you can be penalized.
How to Pay Your Quarterly Tax Payments
If you are self-employed and think you'll have to pay at least $1,000, or a corporation who thinks you'll owe at least $500 in taxes you will most likely have to make quarterly tax payments.
According to the IRS website:
If you are filing as a sole proprietor, partner, S corporation shareholder and/or a self-employed individual, you should use Form 1040-ES, Estimated Tax for Individuals (PDF), to figure and pay your estimated tax. For specific information on how to pay online, by phone, or by mail, refer to the section of Form 1040-ES titled "How to Pay Estimated Tax." For additional information on filing for a sole proprietor, partners, and/or S corporation shareholder, refer to Publication 505, Tax Withholding and Estimated Tax.
If you are filing as a corporation, you should use Form 1120-W, Estimated Tax for Corporations(PDF), to figure the estimated tax. You must deposit the payment using the Electronic Federal Tax Payment System. For additional information on filing for a corporation, refer to Publication 542, Corporations.
What happens if I don’t pay quarterly estimated taxes?
If you don’t pay quarterly estimated taxes, or pay far too little, you can be penalized.
One smart way to avoid penalties on quarterly tax payments is to pay at least the same amount you owed in taxes form last year. For example, if you owed $2,000 in taxes last year, if you make four quarterly estimated tax payments of $500 throughout this year, you should not be penalized. Do keep in mind that if you make much more in profit this year than last year that you still might find yourself paying a large tax bill in April.
This is not an all inclusive treatise of quarterly tax payments. For further reading we recommend you visit the IRS's Estimated Taxes page.