Quarterly Estimated Taxes

For many business owners, the word taxes can cause fear or anxiety. Taxes don’t have to be scary if you plan and budget for them throughout the year. Taxes must be paid on the income you earn or receive during the year. We will talk about who must pay them, how to calculate them, when they are due, and what penalties may exist if they are late. Lastly, we will talk about how to organize, plan and budget for your quarterly estimated tax payments.

Who Must Pay Quarterly Taxes

Business owners who are sole proprietors, partners, or S-Corporation shareholders must pay quarterly estimated tax payments when the taxes they will owe exceed $1,000. Also, Corporations will pay them if their taxes owed will be above $500. Those individuals who receive salary or wages do not have to pay quarterly taxes.

How to Determine Quarterly Taxes

To determine your quarterly tax liability, you must consider your adjusted gross income, taxable income, deductions, and credits for the current year. It may be beneficial to use last years information as a starting point, then you can adjust for changes in your income throughout each quarter. Then make any adjustments for the next quarter. You will generally use Form 1040-ES. Corporations will generally use Form 1120-W.

When to Pay Quarterly Taxes

The year is separated into four periods, January-March, April-June, July-September, and October-December. At the end of each quarter, the payments are due by the 15th of the following month. If this date happens to fall on a weekend or legal holiday, the due date will fall on the following business day. The best way to make these payments is through the Electronic Federal Tax Payment System (EFTPS).

Penalties for Underpayments

There may be penalties if you under estimate/pay your quarterly taxes. You can avoid this penalty if you owe less than $1,000 in taxes after deducting your withholdings and credits. You can also avoid penalties if you paid at least 90% of the tax for the current year or 100% of the tax shown on your return for the prior year whichever is smaller.

Organize, Plan, and Budget

The important thing to remember is to organize, plan, and budget for your quarterly estimated tax payments. An accounting software is the first step in staying organized. This will keep record of your income/losses and expenses and will provide the information you will need to calculate your estimated taxes. Set a reminder on your calendar to plan to make these payments on time each quarter. It may be beneficial to set the money aside each week or every month. You can also pay those taxes on a weekly or monthly basis instead of setting it aside. This will make budgeting for taxes easier if you set aside small amounts more frequently than trying to pay all your estimated taxes each quarter.

Quarterly estimated tax payments do not have to be stressful or scary. With proper planning and budgeting you will be able to make these quarterly payments on time and avoid unnecessary penalties for under paying your taxes.