Paying estimated quarterly taxes
Learn how to pay quarterly taxes if it's required of your business.
If you're a new small business owner, you may be unaware that you might have to calculate and send estimated tax payments to the IRS and — in some cases, the state — each quarter. As an employee, you had the convenience of having your employer withhold and remit taxes throughout the year, but as business owners, you may be responsible for sending quarterly tax payments.
Learn if, and when, estimated quarterly taxes are due, how to estimate what you owe, and how you can build the process into your schedule and budget.
Do the federal and/or state estimated tax requirements apply to your business?
According to the IRS, if you expect to owe $1,000 or more in federal income taxes this year — and your business structure is a sole proprietorship, partnership, or S corporation — you usually must make quarterly estimated tax payments. This also applies to most limited liability companies (LLCs).
If your business is a C corporation or a multi-member LLC that elects to be taxed as a C corporation, you will have to pay quarterly taxes if it expects to owe $500 or more in federal income taxes this year.
You might also owe estimated quarterly taxes to your state. Use the Federation of Tax Administrators Directory to look up your state's requirements.
Individuals are generally exempt from quarterly tax payments if they had zero tax liability for the prior year, were U.S. residents or citizens for the full year, and had a full 12-month tax year the prior year. If you meet all three conditions you are not required to make estimated tax payments for the current tax year.
When are federal estimated quarterly taxes due?
Quarterly estimated tax payments are generally due April 15, June 15, Sept. 15, and Jan. 15. The January date is for the preceding tax year. If any of these dates fall on a holiday or weekend, the payments are typically due the following business day.
A best practice is to put these dates into your calendar, with a reminder several weeks before the due date.
How do you calculate the estimated tax payment amount?
Because you don't know in advance your tax liability for the upcoming year, most business owners calculate the minimum needed to avoid incurring a penalty.
If you expect your earnings this year to be comparable to last year's, use last year's tax return for your starting estimate. Divide last year's total tax by four to reach the minimum estimated quarterly tax payment. Avoid penalties by paying at least 90% of the taxes you owe for this year — or as much as the prior year's tax liability.
If you anticipate that your financial situation is likely to vary from last year, then make your best estimate early on. Conduct a mid-year tax review to make adjustments.
How do you remit and budget for estimated tax payments?
If you fail to pay your quarterly estimated taxes, you can incur IRS penalties, which vary each year.
Review Form 1040-ES, and mail your payments using vouchers included. Once your business is in the system you should start receiving vouchers from the IRS at the end of each year.
You can also submit payments online through the Electronic Federal Tax Payment System (EFTPS); corporations must use the EFTPS or their tax specialists to make payments.
Consider these tips for budgeting your estimated tax payments:
Establish a separate bank account for your taxes, and use it to set aside a monthly amount toward estimated taxes.
If entitled to a tax refund for the preceding year, you can automatically apply that money toward the upcoming year.
Seeking the appropriate information and budgeting ahead of time can help you stay organized, meet your tax obligations, and avoid penalties.
Get tips on accounting at the end of the year.