When & How to Make Estimated Tax Payments
For most Americans, taxes are a once-a-year moment of panic, but for many others — such as private contractors, freelancers, and small business owners — they are reminded quarterly via estimated tax payments.
That’s right. This article is all about the dreaded “T” word. Taxes. For most Americans, taxes are a once-a-year moment of panic, but for many others — such as private contractors, freelancers, and small business owners — they are reminded quarterly via estimated tax payments.
If you’re a business owner gearing up to make your first quarterly estimated tax payment, don’t panic. We’ve got you covered.
When Are Quarterly Estimated Tax Payments Due?
If you’re a new business owner, it’s time to memorize the dates below. If the payment date happens to fall on a weekend or holiday, then the due date is the next weekday. Should you fail to make a quarterly estimated tax payment on time, you may be subject to penalties.
- Payment 1: April 15 (from income earned January 1 to March 31)
- Payment 2: June 15 (from income earned April 1 to May 31)
- Payment 3: September 15 (from income earned June 1 to August 31)
- Payment 4: January 15 (from income earned September 1 to December 31)
Do I Have to Make Estimated Tax Payments?
Generally, if you are a sole proprietor, partner, or an S corporation shareholder, you are required to make quarterly estimated tax payments. If you fall into at least one of the above categories, and you expect to owe more than $1,000 in taxes when your return is filed, you must make estimated tax payments. Corporations are expected to make these payments if they will owe more than $500 when their return is filed.
A simple rule of thumb is, if you are not seeing taxes withdrawn from your monthly paycheck, you should be paying quarterly estimates.
How Do I Calculate Estimated Taxes?
If you owe the government money, the next question is, naturally: how, exactly, are you supposed to figure out how much to pay each quarter? One important aspect of taxes is that you are not required to pay them until you have income from which to pay your taxes. Meaning, if your business is having a tough quarter and your earnings are zero, you will not have to pay taxes for that quarter.
According to the IRS, if you are self-employed or a small business, the amount you owe is calculated by your expected adjusted gross income, taxable income, taxes, deductions and credits for the year. As with all taxes, it’s a percentage.
Rather than do the math themselves, many individuals and businesses take the advice from their CPA regarding estimated tax payments, which are adjusted based on what you owed the previous year. The more money you make – especially if you made more than last year – the more you will owe these four times a year before the April 15 deadline that most of us have marked in red on our calendars.
Pro Tip: Federal Estimated Tax Payments may seem like enough to juggle, but don’t forget about the estimated state tax payments. Unless, of course, you live in a state with no income tax. In this case, you would simply check with the tax agency in your state – typically found through a quick Google search – and find out how to pay online.
Super-Pro Tip: Taxes get increasingly complicated as your business grows. Partnering with a company like airCFO can take the headache out of tax compliance and ensure your company maximizes its deductions year-round. Click the button below to learn more.
What if I Overpay or Underpay on My Taxes?
One caveat to paying ahead is if you pay too much or too little toward your estimated payments. Paying too much simply requires you to fill out another Form 1040-ES for the next quarter and adjust your payments accordingly. Too little, however, can lead to a penalty fee.
Often an underpayment penalty can be avoided if you owe less than $1,000 when taxes are filed or if you have paid at least 90 percent of your taxes owed for the year. One tip is to pay 100 percent of what was owed at the prior year tax filing split among your four estimated tax payments, which ensures a “safe harbor” payment and protects you from penalties.
Note: This 100 percent rule is assuming that you will make as much or more on the current tax year than you did the previous, which is likely your goal!
How Do I Pay My Quarterly Taxes?
The good news is, as with most things these days, paying your estimated taxes is no more painful than noting the due date on your calendar and logging into your computer. To pay your quarterly taxes online, visit: www.irs.gov/payments. The Electronic Federal Tax Payment System (EFTPS) can be used for all federal tax payments, not just estimated payments.
Depending on your filing status, you can also make your estimated tax payments by phone or by mail. Corporations must complete payments using the Electronic Federal Tax Payment System. State tax payment options vary by state.
Even easier than electronic filing is outsourcing your accounting, which frees you and your team up to take care of the everyday responsibilities of running a business and leaves matters of tax compliance in good hands.
Regardless of how you choose to pay your estimated taxes – online, snail mail, via your trusted team at airCFO – it’s important to keep an eye on the calendar and start planning for the next year as soon as the ball drops on New Year’s Eve. Adding four tax dates to your calendar year may seem like the opposite of helpful, but by the time April 15 rolls around, you’ll be a pro. A tax-compliant pro!