One of the big surprises many former employees discover when they make the leap to entrepreneurship is how your relationship with taxes totally changes.
As a W-2 employee, your employer is required to withhold taxes from every paycheck and remit them to the government. That’s why you’ll see deductions for items like “State,” “Federal,” and “FICA” on your paycheck.
But when you are self-employed guess what? You are now the employer, and it’s now your responsibility to handle remitting taxes to the government yourself.
And that’s where quarterly estimated taxes come in.
What are quarterly estimated taxes and why do I have to pay them?
The United States operates on a pay-as-you-go tax system. This is why employers are required to send tax payments on your behalf in throughout the year rather than in one big sum at the end of the year. The same goes for self-employed individuals. Since no employer is sending in your tax payments, you are required to send them in yourself once per quarter.
Quarterly estimated taxes are just what they sound like. They are your due date to pay one quarter of the total taxes you will owe for the year.
Quarterly Estimated Taxes Example
Let’s say you will owe $40,000 in federal taxes at the end of the year. The IRS will then require that you pay $10,000 in quarterly tax payments on each of the four quarterly tax due dates.
Who has to pay quarterly estimated taxes?
Most businesses are required to remit quarterly estimated taxes, but with one big caveat: If you will not owe any taxes at the end of the year, then you are not required to pay quarterly taxes.
For example, say you hold a W-2 job and your employer remits taxes for you. Or you are married and file jointly with a spouse whose employer remits taxes. This may be enough to cover your tax obligation.
Further, due to something called the Safe Harbor Rule, you are only required to remit:
- 90% of the tax you owe for the current year
- 100% of the tax you owed for the previous tax year
The Safe Harbor rule helps new business owners estimate how much taxes they will need to pay quarterly to avoid a penalty.
Now, if, like many established businesses, you will owe a tax bill at the end of the year, then you are likely on the hook to remit your tax payments quarterly.
What if I don’t pay quarterly estimated taxes?
If you were unaware of your quarterly tax obligations, the good news is that the penalty is only about 3% of what you did not remit. And if that amount is less than $1,000 then there will be no penalty.
However, if you owe quarterly taxes and realized you have missed a deadline, don’t wait until the next deadline or the year-end tax filing deadline to catch up. The penalties stack, so remit a payment to avoid paying a fine.
How do I know how much to pay in quarterly estimated taxes?
This is where understanding your business’s financials comes into play. In order to refrain from overpaying or underpaying quarterly estimated taxes, it’s important to understand how much money is entering and exiting your business.
One rule of thumb you often see is “pay 30% of your income in quarterly estimated taxes.” However, depending on your overhead, advertising costs, and other costs to operate your business, paying 30% may mean that you overpay. If you are unsure about how much to remit in quarterly estimated taxes, we recommend speaking with your accountant.
Fortunately, this is also where that word “estimated” comes into play. Even the IRS concedes that you will not know the exact amount of tax you will owe until all is said and done with your year-end business financials. As long as your estimate is close to the amount you actually owe at the end of the year, you will not be penalized.
When are quarterly estimated taxes due?
|Taxable Period||Quarterly Estimated Tax Due Date|
|January 1-March 31||April 15|
|April 1-May 31||June 15|
|June 1-September 30||October 15|
|October 1-December 31||January 15 of the following year|
If the tax due date falls on a weekend or federal holiday, then taxes are generally due the next business day.
How do I file and pay quarterly estimated taxes?
There are two ways to file and pay quarterly estimated taxes.
- File on paper by filling out Form 1040-ES and mail your payments in.
- File online using the Electronic Federal Tax Payment System (EFTPS). Just keep in mind that you must pre-enroll and get approved before using EFTPS. So, don’t leave that until the last minute!
Caveat: Don’t forget state taxes!
Every state’s tax rules and laws are different. If you live in a state with income tax, though, you are likely required to pay quarterly estimated taxes to your state as well. A good accountant based in your state will be able to assist you.
Here at Seller Accountant, we are invested in helping your business succeed financially. One of our top tips for Amazon sellers is to keep a close eye on your cash flow. For that reason, we recommend factoring quarterly tax payments into your cash flow forecast. Read here for more tips on forecasting your cash flow.
This blog is for informational purposes only and should not be construed as tax advice. For tax advice specific to your business, contact your accounting professional.