Quarterly Estimated Taxes for Small Business Owners

Starting a small business comes with so many responsibilities, including filing your quarterly estimated taxes. It’s an often-overlooked aspect that is crucial for running a smooth business operation and avoiding unnecessary penalties. 

Continue reading to learn more about quarterly estimated taxes and how they work.

What are Quarterly Estimated Taxes?

Quarterly estimated taxes is a pay-as-you-go system where small business owners, self-employed individuals, and an employed person can pay their tax liabilities in four installments (every quarter) instead of one single payment every year. Their purpose is to help reduce the burden taxpayers face at the end of the year by spreading the payments into smaller installments.

If you’re a self-employed individual or a small business owner, you’ll have to accurately calculate your estimated taxes and fulfill your obligations regularly to remain in compliance with tax regulations set by the IRS.

What’s Included Under Quarterly Estimated Taxes?

Your quarterly estimated taxes will include all kinds of income, such as:

• Income earned from running a business, freelance work, or independent contracting
• Capital gains or profit from the sale of an asset like real estate or stocks
• Interest earned from bank accounts, savings accounts, or other investments
• Stock dividends
• Rental income
• Alimony received in a divorce settlement
• Gambling winnings, including lotteries or online gambling
• Income from a partnership or S corporation

Apart from your taxable income, you will also have to educate yourself about the specific deductions and credits that may be applicable to your situation. These can include education-related expenses, health insurance premium amounts, deductible business expenses, and much more.

Remember that accurately calculating your deductions and credits will help you in lowering your tax liabilities and saving a significant amount of money. 

Who is Eligible to Pay Quarterly Estimated Taxes?

Self-employed individuals, including partners, sole proprietors, and S corporation shareholders, have to make estimated tax payments if they expect a tax liability of $1,000 or more when their return is filed.

Corporations, on the other hand, have to make the estimated tax payments if they expect a tax liability of $500 or more when their return is filed.

Also, individual employees whose tax liability for the year is not fully covered by the withholding on their earnings may also have to make estimated tax payments.

Special Circumstances or Exceptions:

For Farmers & Fishermen

In a calendar year, a taxpayer who earns at least two-thirds of the income in 2022 or 2023 from farming or fishing only has to pay one payment which will be due January 16, 2024. The other three payment period of the quarter and the due dates aren’t applicable to them.

This is to make sure the farmers and fishermen can accommodate their income fluctuations and cash flow challenges.

For Married People

You can cover your tax liability without needing to make estimated tax payments if you can ensure that enough federal income tax is being withheld from the combined paychecks of you and your spouse.

To do this, you’ll first have to review how much federal income tax is being withheld from your spouse's paychecks. Then you can use the IRS's withholding calculator or consult with an experienced tax professional to determine the necessary adjustments to your own withholding. Make sure after you have calculated your new withholding information, you are filling out a new W-4 form.

Who Does Not Need to Pay Quarterly Estimated Taxes?

Self-employed individuals who expect to owe less than $1,000 on their return and corporations that expect to owe less than $500 at the end of the year do not have to pay quarterly estimated taxes.

Employees who file a Form W-4 and are paid a salary by another individual or organization also don’t have to worry about quarterly estimated taxes. Their employer will withhold a part of their salaries to pay the quarterly taxes on their behalf.

Additionally, if you can meet the following conditions, you may be exempted from paying your estimated tax for the current year:

• You didn’t have any tax liability for the prior year, or if your total tax was zero or you were not required to file an income tax return
• You were a U.S. citizen or resident alien for the entire year
• Your prior tax year covered the full 12 months

How to Calculate Your Quarterly Estimated Taxes?

It can be a little complicated to calculate your quarterly estimated taxes due to your fluctuating income and the ever-changing tax laws. You can refer to the following step-by-step breakdown to accurately calculate your estimated taxes:

1. Start by estimating your total income for the year; remember to consider all sources, including your business profits, investments, and other income
2. You can subtract your deductions and credits (if any) from your income, and it’ll give you your taxable income
3. You’ll have to use the current tax rates and brackets (provided by the IRS) to accurately calculate the tax you have to pay as per your taxable income
4. If you have withheld from your full-time job, you can subtract those from your tax liability
5. Then simply divide your tax liability by four, and you’ll get the amount that needs to be paid at each quarter

Also, make sure that when paying your quarterly estimated taxes, you are being considerate of the deadline to avoid late penalties. The table below highlights the due dates set by IRS for your quarterly estimated tax payments:

Please note that if any of these dates fall on a Saturday, Sunday, or any legal holiday, then the payments would be due on the next business day.

How to Make Payment for Quarterly Estimated Taxes?

You can pay your quarterly estimated taxes both online and offline. The detailed process is explained below.

Paying Online

You can easily pay your estimated taxes online using your social security number (SSN). It’ll work regardless of whether your SSN does not authorize employment or you have been issued an SSN that authorizes employment but you lost your employment authorization. 

Once you have your SSN, you can pay your taxes online in various ways, such as:

• Pay through your online account created on the IRS website
• Pay using the IRS2Go app
• Make a direct payment from your checking or savings account
• Use a credit or debit card, but in this case, you’ll have to pay the convenience fees charged by the service providers
• Use the EFTPS or Electronic Federal Tax Payment System to schedule your payments online

Pay Offline

You can pay your quarterly estimated taxes in cash through retail partners. But it's applicable only for individuals with a maximum of $1,000 per day per transaction. You can get started by registering yourself on the official payment provider's website.

Please note that IRS recommends against sending your cash payments through the mail.

If you wish to pay your estimated taxes by mail, you’ll have to fill out Form 1040-ES and send the money via a check or money order.

Ask Your Employer 

This would only be applicable to those who have a full-time job and are doing freelance work on the side. You might be required to pay quarterly estimated taxes, but you can reduce your burden of calculating, estimating, and filing your taxes each quarter.

You just need to ask your employer about withholding a little extra money from your earnings each month. You’ll also need to fill out a new W-4 form, but this method will ensure that your tax liability is covered through your regular paycheck. It’ll also minimize the risk of miscalculations and errors. 

What Happens if You Don’t Pay Your Quarterly Estimated Taxes?

You’ll have to pay a penalty or a fine for underpayment of estimated tax if, in case, you aren’t able to pay enough estimated taxes throughout the year. Taxpayers can avoid this penalty if their tax liability, after subtracting the withholdings and credits, is less than $1,000.

You can also be exempted from paying an underpayment penalty if you have paid at least 90% of your bill for the previous tax year on time.

Furthermore, the penalty can also be waived in special circumstances if:

• The failure of payment was caused due to a disaster, casualty, or any other unusual circumstance, and it would be unjust to impose the penalty. 
• You retired after reaching the age of 62 or became disabled during the tax year of the estimated payments, and the underpayment was caused to a reasonable cause and was not neglected willfully.

It's important that you review your specific circumstances or consult with an experienced tax professional to understand your estimated tax liabilities. That’s because even though the IRS has simplified the process and they can calculate your penalty for you, you’ll still have to be careful of any potential errors. Additionally, it's worth noting that the IRS can charge interest on the penalty if you don’t pay it by the listed due date.

Strategies to Manage Quarterly Estimated Taxes

It can be confusing and overwhelming for small business owners to handle and file their taxes accurately. To simplify the process, let’s discuss some simple steps that can help you manage your quarterly estimated taxes:

• Regularly review and update your income projections to make sure your estimated tax payments align with your actual earnings
• When calculating your expected income for the quarter, include every income from self-employment, investments to rental income, and other taxable sources
• Assess all the tax laws and regulations carefully to figure out any deductions, credits, or exemptions that may apply to your specific situation
• Consider investing in good accounting software or hiring a qualified tax professional to track your income, expenses, and tax obligations
• Plan ahead and set some funds aside for tax payments to avoid financial strain toward the end of each quarter 
• Make your estimated tax payments before the due date to avoid late penalties and interest 
• Adjust your estimates if your income or circumstances have changed during a quarter
• Keep accurate records of the payments as evidence in case of an audit

When to Seek Help from Experts

If you have a growing and thriving small business, you can expect your business operations to become more complex. As a result, you’ll need to hire more employees, expand your footprint, invest in improved infrastructure, work on effectively scaling the operations, and so much more. During this chaos, it will become harder and harder to take time out to handle the complexity of accurately calculating and filing your quarterly estimated taxes.

This is when we’ll recommend you consider outsourcing your tax needs to a reliable and reputable company. They’ll ensure that your taxes are filed accurately and on time, avoiding the chance of errors and costly penalties. They can also help in maximizing your profitability by identifying potential deductions and credits and minimizing your tax liability by optimizing your tax strategy.

On the other hand, by hiring a tax professional, you’ll be able to dedicate your time to what you do best, i.e., running and growing your business.

Summing Up: Quarterly Estimated Taxes for Small Business Owners

Filling accurate and on-time quarterly estimated taxes is very important for self-employed individuals and small business owners. It ensures that your business is meeting all the necessary tax obligations and remains in compliance with the regulations set by the IRS. It also protects your business from potential penalties, fines, and legal issues that may arise from non-compliance.

That being said, we can totally understand how complicated it can be to deal with taxes and government regulations. Therefore we’ll strongly recommend you work with our professionals who specialize in tax services for small businesses.

You can contact Taxsurety today, and our experts will help you pay your estimated quarterly taxes with accuracy and in compliance with the IRS.