We’ve covered a lot of different tax scenarios already, but unfortunately, there’s always more to learn and more scenarios to consider. If you’re a part of a startup or small business, hopefully you’ve got someone handling your bookkeeping who’s keeping track of your tax obligations, but if you’re starting out on your own or your business is structured as a partnership, like a LLC, you probably need to be making quarterly tax payments.
Here’s what you need to consider.
Quarterly Tax Payments: Who Needs to Pay?
If you’re self-employed at all, you have different tax obligations than someone who collects a regular paycheck from an employer, but there are complications above and beyond this if you happen to run your own business, or be involved in the leadership of one. Independent contractors, sole proprietors, partners, and S corporation shareholders all need to make quarterly tax payments if they expect to owe more than $1000 when their return is filed, and corporations in general need to make payments if they expect to owe more than $500 (there are some caveats and exceptions to all of this, but there are the fundamentals).
If you’re here, you’re probably not too concerned about the tax considerations of freelancers or contractors, but it can be easy for first-time founders and partners to overlook these tax obligations, especially with all of the other things that need your attention when you’re first starting out. Fortunately, the IRS makes this part pretty easy for you: for most people, form 1040-ES will help you figure out what you need to pay (this is also the form that you’ll use to estimate your tax payments on dividends, interest and other less standard forms of income, so it’s worth familiarizing yourself with it).
If you’re taking care of this yourself, you might also want to make use of the withholding estimator or other tools that the IRS has provided. Estimating your expected income can be tricky, depending on the consistency and maturity of your business, but it’s fairly easy to correct this with another 1040-ES form, so don’t panic if your actual earnings end up being substantially higher or lower than what you estimated.
Quarterly Tax Payment Dates
Once you’ve figured out how much you owe, you need to consider the estimated tax payment dates. These are, unfortunately, not as simple as you might think, and the ‘quarters’ don’t neatly conform to the year in every case.
The first tax payment is actually the final tax payment of the previous year (Q4), due January 15. Conveniently, your first estimated tax payment is due the same time that everyone else needs to file their regular taxes: April 15th.
Here are how quarters are divided for estimated tax payments:
- First Quarter: January 1st through March 31st. Due April 15th.
- Second Quarter: April 1st through May 31st. Due June 15th.
- Third Quarter: June 1st through August 31st. Due September 16th.
- Fourth Quarter: September 1st through December 31st. Due January 15th.
Make sure to note that the second quarter is much shorter than the others, and the fourth quarter is longer.
Penalties & Other Considerations
If you substantially underpay your estimated tax, there can be penalties, but don’t panic! So long as you get close to what you owe (generally less than $1000), you won’t be penalized, and there are other ways to avoid getting dinged. If your income is especially uneven, you can avoid this penalty by annualizing your income or making uneven payments.
Also, if you, like a lot of startups and new businesses, you don’t have any profit to report at all, and you’re running a net operating loss, there’s a whole different set of considerations (and if you can swing it, there are tax advantages as well).
Getting Taxes Right
Taxes don’t have to be complicated, but they often are, and even if your startup is small, you probably want to think about retaining the services of a professional. A lot of new companies try to skimp on accounting and bookkeeping while they stay lean, but this can end up causing more problems than it solves. Whether you’re just starting out and looking for funding or well into profitability, having solid financial help can make a huge difference.