The U.S. tax code contains more than 10 million words. It’s no wonder so many people feel anxious about filing and paying taxes each year!
If you’re a business owner, you’re likely feeling even more stressed out about taxes than the average person, especially when it comes to paying quarterly taxes.
Never heard of these taxes before? Not sure what they are or how to pay them? Keep reading. Outlined below is your guide to quarterly taxes.
What Are Quarterly Taxes?
As the name suggests, quarterly taxes are tax payments that you make four times per year (every quarter). Certain people have four tax days per year that they need to keep track of, rather than just the often-discussed April 15 deadline.
There are two types of taxes that quarterly tax payments are meant to cover:
- Self-Employment Tax: About 15 percent of one’s income, this combines Social Security and Medicare taxes into just one tax
- Income tax: This tax is based on the payer’s specific income tax bracket. What are the standards used to determine if someone is a contractor? There are several, and the IRS breaks the determination down into three parts.
Who Has to Pay Quarterly Taxes?
In general, quarterly tax payments are required of small business owners and people who are self-employed (this includes freelancers and independent contractors) who also owe at least $1,000 in taxes. If you owe less than $1,000, you still need to pay taxes, but you can do so when you file your tax return for the year.
There are some other people who might benefit from making quarterly tax payments, including landlords and investors.
If you have income from people who rent your properties or from other investments, this helps you ensure you’re covered when tax season rolls around. This income might not be factored into the amount of money that your employer withholds from your paycheck, so making quarterly payments protects you from underpaying and getting hit with a tax penalty.
What Happens If You Don't Pay Quarterly Taxes?
Speaking of penalties, let’s address what happens if you fall into one of the categories mentioned above but don’t make quarterly tax payments (or don’t pay enough). Failure to make quarterly tax payments, or failure to properly estimate your quarterly tax payments (more on that in a minute), will result in an underpayment penalty from the IRS.
The size of your penalty will vary depending on several factors, including the amount by which you underpaid. You can use the IRS’s Form 2210 to calculate, specifically, what you owe.
There are a few exceptions to this rule. The IRS might be willing to waive the penalty if you have been a victim of a casualty or natural disaster, for example. They may also waive it if you are at least 62 years of age, have retired or become disabled in the last year, and underpaid due to what they deem “reasonable cause” instead of “willful neglect”.
How to Pay Quarterly Taxes
Do you need to pay quarterly taxes? Are you starting to feel unsure of how to calculate these payments and make sure they’re made on time?
Here are some steps to take to simplify the process and ensure you (and your business) are covered:
Write Down the Payment Deadlines
A good starting point to making sure you’re paying quarterly taxes properly is to write down the following payment deadlines:
- April 15 (for the period of January 1 to March 31)
- June 15 (for the period of April 1 to May 31)
- September 15 (for the period of June 1 to August 31)
- January 15 (of the following year, for the period of September 1 to December 31)
Put these dates in your planner, add them to your online calendar, do whatever you need to do to ensure you don’t forget to make your payments on time.
Calculate Estimated Payments
Next, you’ll need to calculate what your estimated quarterly payments will be. There are a few different techniques you can use to do this, including the following:
- Estimate how much you’ll owe for the whole year, then send 25 percent of that amount to the IRS (this approach works well for those who have fairly stable yearly income)
- Use the IRS’ worksheet to estimate annual tax liability based on the amount of money you’ve already earned (this approach works better for those who have more varied income)
No matter which of these approaches you choose, you’ll need to use the IRS Form 1040-ES to show your estimated income for the year.
Keep in mind that if you overestimate or underestimate your earnings for one quarter, you can complete another form and adjust as needed. When you go to file your yearly return, you can attach IRS Form 2210 and explain why the payments are not equal.
Make Payments on Time
After you’ve estimated your tax payments, the next step is to make sure they get sent to the IRS on time.
There are lots of ways that you can make quarterly payments, including mailing your Form 1040-ES to the closest IRS office, making payments online, or paying them over the phone. If you run a corporation, you must make your payments through the IRS’ Electronic Federal Tax Payment System.
Contact a Professional If Needed
If you’re confused by anything when you’re estimating or paying your quarterly taxes, the team at J. Hall & Company can assist you! Reach out to them early and talk to them about your situation. That way, they can provide guidance and help you make the right decisions without you missing any important deadlines.
Get Tax Help Today
When you are first getting started in the small business world, the idea of keeping track of and paying quarterly taxes can definitely be intimidating. Follow the guidelines explained above, though, you’ll have no trouble staying on top of all your accounting needs.
Our tax experts at J. Hall & Company can answer any questions you might have so you can feel confident about managing your money. If you do need additional guidance, schedule a free consultation call with our team. From tax filing strategies to tips on bookkeeping and accounting, we’ve got you covered!