Predictable, logical, thrilling as a saltine cracker. Estimating and paying quarterly taxes isn’t sexy.
But if we’ve learned anything from the nerd archetype of 80s American cinema, it’s that the boring, milquetoast side-character we’ve written off? That turns out to be exactly what we’ve needed all along. Think “Back to the Future.” Imagine yourself as Lorraine Baines and estimated quarterly taxes as nerdy George McFly. Sure, we spend most of the movie rolling our eyes at how lame George is. Until he saves the day.
It may not be traditionally swoon-worthy, but paying quarterly taxes is necessary for running your small business. So hold on to your pocket protectors: we’re about to dive into what exactly quarterly taxes are, why they exist, and how to calculate them.
What are quarterly taxes?
You know how taxes work. If you earn income that isn’t subject to withholding, you’re responsible for giving the government its cut at the end of the year. Quarterly taxes just disperse this throughout the year. Instead of paying once, you’ll pay four times. Quarterly.
What? You mean tax time is now year-round? Is there no escape? News flash: if you’ve ever earned wages, you’re already done this. Just check out your pay stubs.
These taxes go towards Social Security and Medicare as well as income tax. And no, you can’t just hoard all that money throughout the year. If you do, the IRS will slap you with penalties. Besides, that’s a dangerous game to play, like leaving home without your inhaler. More on that later.
But why quarterly taxes?
As individuals, we have to reconcile our taxes once a year. April 15th. You know the drill.
But for large (or small) businesses who are making significantly more money than your average Minecraft-obsessed computer jockey, the government needs to ensure that money is coming in more regularly. Plus, estimating and paying quarterly taxes is actually good for your business: it ensures you aren’t hit with a surprising and unpleasant tax burden at the end of the year.
So who exactly needs to pay quarterly taxes?
Quarterly taxes might feel like attending a chess club for the first time—suddenly you’re asking yourself, “do I even belong here?” Well, here are the parameters for Quarterly Taxes Club:
If your business is considered a:
- Sole proprietorship
- S corporation
- You’ll owe $1,000 or more in federal income taxes this year
- Your withholding and credits cover less than 90% of your tax liability for this year or 100% of your liability last year (whichever is smaller)
Congratulations! You need to pay quarterly taxes.
You may also need to pay quarterly taxes if you earn income from:
- That killer side hustle
- Large dividends from investments
- Rental payments
- A sudden (and thrilling) financial windfall
So how much will I owe in quarterly taxes?
Pull up your tube socks and paste down that cowlick because we’re about to talk tax estimation. In order to pay your quarterly taxes, you will need to predict just how much you’ll owe.
There are two common ways to determine your quarterly taxes.
- Estimate how much you think you’ll owe for the year by determining your taxable income, then use the appropriate percentage for your bracket. (Then divide by four for each payment.)
- Estimate your tax liability based on what you’ve already earned this year at the end of each quarter. You’ll be estimating based on income and deductions. This option is good for consistent income that can be projected into the future.
Choose your estimation method wisely. Irregular income can put you in danger of underpaying, leaving you more vulnerable than a nerd in gym class to penalties and interest.
It also means extra paperwork. If your owed taxes change from quarter to quarter, you’ll need to file a new form 1040-ES every time your payment changes.
The good news? In the case of overpaying, the money will be applied as a credit to your next payment.
When’s my payment due?
You don’t have to be a brainiac to know when to pay. The IRS makes it very clear.
1/1/21 – 3/31/21: due 4/15/21
4/1/21 – 5/31/21: due 6/15/21
6/1/21 – 8/31/21: due 9/15/21
9/1/21 – 12/31/21: due 1/18/22
You can pay more often than four times a year. For some business owners, smaller, more frequent payments are easier. As long as you don’t pay fewer than four times a year, you are free to figure out what works best for your cash flow.
How do I pay?
It’s no surprise the IRS makes it easy for you to pay your taxes. They even offer a platform which allows you to automate payments through the Electronic Federal Tax Payment System. You can schedule payments up to a year in advance. Talk about extra credit.
When it comes to the practical matter of actually paying, you can do so via mail, website, or using your mobile device.
What happens if I don’t pay quarterly?
Like a cheerleader blowing off chemistry, you might be tempted to skip class and hope you do well on the final. But every self-respecting nerd knows if you don’t show up to class, there are consequences.
Not paying quarterly can get you into costly hot water in the form of penalties and interest. And no one wants to pay more money than they have to.
The real danger is being caught off-guard by the actual amount you’ll owe. If you don’t accurately save, a miscalculation can wind up being the proverbial whoopie cushion on your chair. Even if you do have the cash, you’ll no doubt be wiping out reserves allocated for something else in your business.
More quarterly tax questions?
Methodical dedication isn’t flashy but it gets things done. Paying your estimated quarterly taxes is no different. Paying on time will not only save you money, but huge headaches down the line.
Need help with your math homework? As number geeks ourselves, we are happy to assist. Schedule a consultation with Know Your Number Accounting today for help determining what you owe and how to pay.