Quarterly Estimated Taxes: What Business Owners Need to Know

Quarterly Estimated Taxes: What Business Owners Need to Know

For small business owners and self-employed individuals, quarterly estimated tax payments are a crucial part of staying compliant with the IRS and avoiding penalties. Unlike traditional employees who have taxes withheld from each paycheck, business owners must estimate and pay taxes throughout the year. Here’s what you need to know to stay on top of your tax obligations.

Who Needs to Pay Quarterly Estimated Taxes?

You are required to make estimated tax payments if you expect to owe $1,000 or more in taxes for the year after subtracting withholding and refundable credits. This applies to:

• Sole proprietors

• Freelancers and independent contractors

• S-Corp shareholders (for pass-through income)

• Business owners with no W-2 wage withholding

• Anyone subject to self-employment tax (earning $400 or more in net self-employment income)

Corporations generally must make estimated tax payments if they expect to owe $500 or more in taxes for the year.

If you receive W-2 income, you may be able to adjust your withholding instead of making estimated payments. A tax professional can help determine the best approach.

When Are Quarterly Taxes Due?

Estimated tax payments are due four times a year:

• April 15 (for income earned January – March)

• June 15 (for income earned April – June)

• September 15 (for income earned July – September)

• January 15 of the following year (for income earned October – December)

If the due date falls on a weekend or holiday, the deadline is the next business day.

How to Calculate Your Estimated Taxes

The IRS recommends using Form 1040-ES to estimate your quarterly tax payments. The basic calculation includes:

• Estimating your total income for the year

• Subtracting deductions and credits

• Using the current tax brackets to determine your expected tax liability

• Including self-employment tax (Social Security & Medicare at 15.3%)

• Dividing your tax liability into four equal payments

If your income is inconsistent, you may benefit from using the annualized income installment method (Schedule AI of Form 2210) to calculate payments based on actual earnings per quarter instead of equal installments.

A tax professional can help refine your estimates and ensure accuracy.

How to Pay Estimated Taxes

You can submit your payments using:

• IRS Direct Pay (online payment directly from a bank account)

• Electronic Federal Tax Payment System (EFTPS) (allows scheduled payments)

• IRS2Go mobile app

• Mailing a check with Form 1040-ES

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Scheduling automatic payments through EFTPS can help avoid missed deadlines.

Avoiding Underpayment Penalties

If you underpay, you may be subject to IRS penalties. To avoid this:

• Pay at least 90% of your current year’s tax liability, or

• Pay 100% of last year’s total tax liability (110% if your adjusted gross income was over $150,000)

Using the safe harbor rule ensures you won’t face penalties, even if you ultimately owe more.

Final Thoughts on Quarterly Estimated Taxes: What Business Owners Need to Know

Quarterly estimated taxes don’t have to be a headache. By staying organized, keeping track of income, and making timely payments, you can avoid penalties and keep your business finances in good standing. Need help calculating or making your estimated tax payments? KB2 Bookkeeping & Tax is here to guide you!

Disclaimer: This article is for informational purposes only and should not be considered legal or tax advice. Tax laws are subject to change. Always consult a tax professional for guidance specific to your situation.