How to Pay Quarterly Taxes if You’re a Business Owner

People who earn a steady monthly paycheck don’t have to file taxes and cover federal tax liabilities like income tax, social security, and Medicare. That’s because their employer withholds taxes from their paycheck. But what if you’re self-employed or have income that is not subject to state income tax withholding? Do you still need to pay taxes?

Here’s what quarterly taxes are all about, how to pay them, and what you need to know when filing your tax returns is due.

Why are quarterly tax payments required?

Uncle Sam operates a pay-as-you-go tax system, so if you earn money that is not subject to withholdings (e.g., freelancing, stipends), you need to pay your tax bill throughout the year, as you earn the salary. The tax is paid in four installments based on an estimation of your adjusted gross income from self-employment and your expected personal tax return for the year.

Paying quarterly taxes accurately and in a timely manner eases the burden of tax duties. By the time the tax deadline approaches, you will have already paid the taxes in full.

Who needs to pay quarterly taxes?

According to the IRS, self-employed people who expect a tax liability of at least $1,000 and whose income is not automatically withheld are generally required to pay quarterly taxes. Prime candidates for this are freelancers, sole proprietors, independent contractors, small business owners, and S corporation shareholders.

This also includes earnings from dividends, alimony, interests, investments, rental income, capital gains, prizes, and awards. If you overpay by the end of the year, you’ll get a refund. Conversely, underpayment subjects you to an IRS penalty. Check out Form 2210 to see if you are subject to any penalty for underpayment. Also, read Form 1040-ES, Estimated Tax for Individuals, and Form 1120-W for Corporations to see in more detail to whom quarterly taxes specifically apply.

READ MORE  How to Form a Corporation

Who doesn’t need to pay quarterly taxes?

You can avoid paying quarterly taxes if you receive a monthly salary and wage. File the Form W-4 with your employer and ask them to withhold a larger proportion of your salary to pay quarterly taxes on your behalf. If you meet certain conditions such as expecting to owe less than $1,000 on your return, having no tax liability, and being a U.S. citizen or resident for the whole year, you may be exempt from paying quarterly taxes.

How to avoid penalties

To avoid underpayment penalties, accurately calculate your quarterly taxes. The IRS offers a “safe harbor” method. Use one of the three safe harbors: calculate what you owe for this year and pay 90% of that amount in four installments, pay 100% of the tax liability for the previous year, or pay 110% if your adjusted gross income is higher than $150,000 for married couples and $75,000 for singles.

When are quarterly taxes due?

The IRS allows you to pay taxes as a single estimated tax payment or make four payments quarterly. Quarterly taxes are generally due in April, June, September, and January of the following year. The first quarter covers three calendar months, the second quarter is from April to May, the third quarter is from June to August, and the last quarter covers September to December.

How to Pay Quarterly Taxes if You re a Business Owner

Note: If the payment dates fall on a weekend or national holiday, the payment is postponed to the next business day.

Keep in mind that, apart from federal taxes, depending on your state or city of residence, you may need to pay quarterly state taxes. Each jurisdiction has its own tax rates and due dates, so double-check with your state’s tax agency.

How to pay quarterly taxes?

Now that you understand how quarterly taxes work, you can set up an IRS payment plan. Payments are easy with the IRS’s electronic system. You can choose one of the following options:

Pay online

You can pay by Credit Card through an approved payment system. There is a fee for paying via Credit Card ($2.59 per payment or up to 2% of the amount paid), or you can use IRS Direct Pay, which is fee-free.

Pay by phone

You can make payment for free by enrolling in the Electronic Federal Tax Payment System (EFTPS).

Pay by app

IRS2Go is the official mobile app of the IRS. You can make payments, get free tax help, check the status of your taxable income, and more.

Pay by cash

If you prefer traditional payment methods, you can visit your local Taxpayer Assistance Center or refer to IRS form 1040-ES.

Establish a plan for managing your taxes

If you’re self-employed, calculating what you owe and paying taxes four times a year can be challenging. However, as a sole proprietor or freelancer, mastering your quarterly taxes is important for maintaining financial savvy throughout the year. It is recommended to mark calendars, manage documents, create a financial plan, and pay taxes promptly.

Leave a Reply

Your email address will not be published. Required fields are marked *