If you received a yearly tax bill that was more than you anticipated, it might be because you didn’t pay estimated quarterly taxes for the year prior.
What Are Estimated Quarterly Taxes?
Quarterly taxes are estimated taxes you pay every three months ahead of your annual tax filing. Every quarter, you must pay a portion of the annual income tax you anticipate owing. The IRS requires you to make these estimated quarterly payments rather than wait until the end of the tax year to pay all the taxes you owe for the year.
Quarterly taxes generally include payments of two types of taxes:
- Income taxes – Paid on all wages, net business profits, investment returns, and all other income you earn
- Self-employment taxes (SE taxes) – Or a version of Medicare and Social Security taxes for the self-employed
Who Must Pay Quarterly Taxes?
Anyone who owns a business or works for themselves and expects to owe federal income taxes must pay quarterly taxes. If you paid any business taxes last year, you might be required to file and pay estimated quarterly taxes. This include if you’re a:
- Self-employed individual
- Sole proprietor
- Shareholder of an S corporation
- Owner of a corporation
- Partner in a partnership
If you are an officer in a corporation, whether or not you need to pay estimated quarterly taxes depends on how you serve the business. If you perform a role that would qualify you as an employee of the business, then the business makes estimated quarterly payments on your earnings on your behalf; if you also earn dividends as an officer of the business, you must also pay estimated income taxes quarterly on that.
Who Does Not Have to Pay Quarterly Taxes?
If you file as an individual and you anticipate owing less than $1,000 in taxes for a given tax year, you do not need to make estimated quarterly tax payments. If you file as a corporation and you anticipate owing less than $500 in taxes at year’s end, you may also be exempt from paying estimated quarterly taxes.
You can also avoid making estimated quarterly tax payments by filing a Form W-4 as an employee who receives a salary from an employer rather than filing as the employer–or self-employer–instead. However, you’re still technically responsible for those payments. As an employee, your employer withholds those taxes from your paycheck and makes the estimated quarterly tax payments for you. Of course, if you’re self-employed, you’re responsible for doing this. Fortunately, a small business CPA can help you get it done.
How to Estimate the Quarterly Tax Payments You Owe
There are two ways you can determine how much to pay in estimated quarterly taxes based on when you receive your income.
If you receive it evenly year-round, simply calculate the entire year’s income and deductions to determine your annual tax burden, then divide it by four. This will give you the amount of each of your payments. If you go this route, you could potentially pay too much or too little in quarterly payments, though you can usually correct this in your payment for the subsequent quarter.
If you don’t receive your income evenly year-round, calculate your tax burden based on the income you earned and the deductions you can claim for that quarter. Going this route will require more diligence with your accounting throughout the year, but you’ll make more accurate quarterly payments. Fortunately, you can enlist the aid of a small business CPA to help you figure all this out.
You can also get help calculating your estimated annual tax due and then breaking it down into four quarterly payments by using IRS Form 1040-ES.
How to Estimate Federal Tax Payments
Your federal tax rate depends on your business structure or the business entity you formed when you filed your articles of incorporation, as well as your business’s tax bracket and whatever credits and deductions you may qualify for. Your small business tax advisor can tell you how business structure affects your tax rate.
Generally, however, you’ll need to pay estimated quarterly self-employment taxes if you’re a sole proprietor or an LLC member. If you’re considered an employee of a C corporation or an LLC being taxed as one, you won’t need to pay self-employment taxes. Still, you will need to pay the employee’s portion of the Medicare and Social Security taxes you incur.
How to Estimate State Tax Payments
Which taxes you’re responsible for paying to one or more states or localities where you work or your company does business, depends on the tax rules of those states and localities. You may also need to pay employment taxes if your business has employees and sales and use tax to the state. What determines this includes:
- Where your business operates
- Whether a given state levies income taxes
- How your business is structured
If you operate in multiple states, you may owe estimated quarterly tax payments in each of those states. This may be a factor if your headquarters, inventory, employees, customers, sales, and time spent are not always all in the same state. Bookkeeping services in Charlotte can tell you what types of taxes you may need to pay quarterly in North Carolina and elsewhere.
When Are Quarterly Estimated Tax Payments Due?
Typically, estimated tax payments are due on:
- April 15
- June 15
- September 15
- January 15 (of the following year)
If any of those dates fall on a holiday or weekend, the next business day becomes the new deadline for that quarter.
How to File Estimated Quarterly Taxes
Which forms you need to file to pay your estimated quarterly taxes depends on your business structure. Single-member LLCs and sole proprietorships must report income and expenses from the business on a Schedule C and file it with a Form 1040 for their personal income by April 15. Multi-member LLCs and partnerships with a profit to report must file a Form 1065 by March 15, while S Corporations must file a Form 1120S, also by March 15. Your small business tax advisor can help you plan for your annual tax filings as well as your quarterly ones.
Do I Still Need to File Annual Taxes If I’m Paying Estimated Quarterly Taxes
Even though you’re paying an estimated quarterly tax, you must still file an annual federal tax return. At that time, you’ll calculate your actual tax liability as opposed to the estimated tax liability you used to make quarterly payments. Then, if you still owe in annual taxes after subtracting what you’ve already paid in quarterly taxes, you’ll pay the remainder; if, on the other hand, you overpaid in estimated quarterly payments, you can request a refund of the overpayment.
Help Figuring Out Your Estimated Quarterly Taxes
Figuring out your estimated quarterly tax liability can be a challenge. If you overpay, you can always request a refund, but you have to go through a process to do so, all the while being without that valuable income you can put to better use; if you underpay, you can be subject to a penalty or, at least, a much higher payment comes the next quarter. Either way, when it comes to calculating and making estimated quarterly tax payments, you want to get it right the first time.
That’s why there are trusted bookkeeping services like Scott Boyar, CPA, to rely on. Also an accountant in Charlotte, NC, Scott Boyar has experience helping small businesses of all types meet their quarterly tax obligations.