Hi my fierce business owners! So what do you need to know about quarterly estimated tax payments?
Let me break it down for you.
Quarterly estimated tax payments are payments made to the IRS 4 times a year:
Quarter 1: April 15th
Quarter 2: July 15th
Quarter 3: September 15th
Quarter 4: January 15th (yes, the following year)
Quarterly estimated tax payments are required for self-employed, sole proprietors, LLC owners, and investors that will owe over $1,000 in taxes a year.
Do you have to pay taxes like this?
If you are in the category above, yes you have to pay at least 90% of estimated taxes you think you will owe throughout the year. If you don’t, you might have to pay penalties. Unlike employees and wage workers who get taxes withheld on each paycheck, business owners do not withhold taxes on each invoice paid. That is why the IRS implemented quarterly tax payments: so that they can collect taxes more frequently than just one time a year from business owners.
Why do you have to pay this way?
The question really should be WHY NOT do this? It will make paperwork less of a dread, you won’t owe large sums of money to the IRS during tax filing time, and you can PLAN for this payment.
So how do you figure out how much to pay each quarter?
A super high-level way to compute your quarterly estimated taxes is:
Step 1: Estimate how much income or revenue your business will make for the year
Step 2: Estimate how much expenses your business will incur for the year
Step 3: Subtract expenses from revenue to arrive at your estimated net income
Step 4: Divide net profit by 4. This is your estimated net profit per quarter
Step 5: Multiply your estimated net profit by 30%. The number you get is a high-level estimate of how much estimated tax you need to pay for the quarter.
Throughout the year, if your projected income changes, the amount of your payments should be adjusted so that you aren’t grossly overpaying or underpaying. You can change your payments. If you overpay one quarter, then make the next payment less and vice versa. Easy peasy!
To get the most accurate estimates, you may decide to leverage the help of an Accountant. If you have an Accountant or Tax Professional on your team, they should be calculating your quarterly estimated taxes for you and telling you how much you need to pay in. Definitely reach out to them if you aren’t already getting this service.
Well wishes on your tax journey. As always, hit reply if you have questions about quarterly estimated taxes.