Setting out on your own by starting a small business is an adventure that takes a tremendous amount of work, no matter how well you’ve prepared—or whether you’ve done it before. There are many moving parts to keep track of and thousands of things that can go wrong, so it takes vigilance and dedication.
However, there are some things you can do to make the entrepreneurial learning curve a little more manageable. You can improve your chances of success by taking the time to learn about your compliance and tax requirements as the owner of a small business.
If you’ve started a business before, you know that a small business’ tax obligations can be rather complicated. And if you’ve never been self-employed before, quarterly taxes are an important requirement you might not have any experience with.
What are quarterly taxes?
Quarterly taxes are estimated tax payments made in each quarter in advance of the annual tax return. Each quarter you pay a portion of your expected income tax for the year, but the payments are estimated because they occur before you fill out your tax return.
The United States income tax system requires you to pay as you go with estimated taxes throughout the year instead of paying all of the taxes you owe at the very end of the year.
The quarterly taxes and their deadlines give individuals and businesses a structure for making these regular installments toward their final income tax due.
Who needs to pay quarterly taxes?
Generally speaking, everyone who expects to file and pay federal income taxes needs to pay quarterly taxes. If you paid anything in taxes last year, you might need to pay estimated taxes if you or your business fits into one of these categories:
- Self-employed
- Sole proprietors
- Partners
- S-corporation shareholders
- Corporations
Who does not need to pay quarterly taxes?
In practice, individuals might not need to make estimated payments if they expect to owe less than $1,000 on their return. Corporations might not need to pay quarterly taxes if they expect to owe less than $500 at the end of the year.
Of course, the most common way individuals avoid paying estimated taxes is by receiving a salary from an employer. If you file a Form W-4 and are paid as an employee by another individual or organization, then your employer will withhold part of your wages to pay quarterly taxes on your behalf. Technically, every employee still pays quarterly taxes, but you don’t have to remember or estimate it on your own if your employer should be doing it for you.
Self-employed individuals who still get part of their income through an employer must remember that you might need to pay additional estimated taxes for your self-employed income. Alternatively, you can adjust your W-4 to have your employer withhold a greater portion of your salary and off-set your other income.
How do you calculate quarterly taxes?
The best way to calculate your quarterly taxes is by using an estimate of your total expected income for the year. If you expect to earn the same as you did last year, then start with the previous year’s total. However, if your business is just starting out or your expected income is wildly different than it was in the past, you may need to make more careful calculations based on your quarterly income.
Here are the basic steps to follow if you want a precise measure of your quarterly tax due:
- Calculate your total expected income
- Apply tax deductions to get your adjusted gross income (AGI)
- Multiply your AGI by the relevant tax rate to find your estimated income tax owed
- Remember your total expected income from step 1? Use that total expected income to also estimate the self-employment taxes you’ll owe for Social Security and Medicare
- Add together your estimated income tax owed and your estimated self-employment taxes. That’s your estimated tax for the year
- Take your estimated tax for the year and divide it by four (for the four quarters of the year); that’s your quarterly tax amount!
Individuals can use IRS Form 1040-ES to figure their estimated quarterly tax payments. Corporations can rely on IRS Form 1120-W, Estimated Tax for Corporations, to calculate their quarterly taxes.
Are quarterly taxes delayed for 2020?
Quarterly tax deadlines in the first two quarters of the 2020 tax year were postponed, but now the IRS has returned to the established deadlines for the final two quarters.
Did COVID-19 affect quarterly taxes?
The crisis surrounding COVID-19 and its challenges to many businesses led the IRS to make some adjustments to tax deadlines in the first half of 2020. The first two quarterly estimated tax deadlines were pushed back from April and June to July 15. The IRS announced there would be no fines for late payments in this period.
While the pandemic is still affecting businesses everywhere, deadlines in the final months of 2020 have been left as is. The third quarter taxes were due September 15, and the final quarter of estimated taxes are due January 15, 2021.
Do business owners need to pay quarterly taxes for PPP and EIDL funds?
Many businesses have survived the crisis this year with loans supplied through the U.S. Small Business Administration like the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loans (EIDL).
It’s natural to be concerned about having to pay estimated taxes on these loans, but the good news is that if a loan is forgiven, it does not count as taxable income. Therefore, if you file to have these emergency loans forgiven, and they won’t count as income on your tax return, then you don’t have to pay quarterly taxes on them. It all depends on how they’ll show up on your final tax return.
The only downside is that if the forgiven loans don’t count as income, you can’t claim tax deductions for the way you used them. Business expenses made with forgiven government loans are not deductible. However, this may change with coming legislation. We will keep you posted.
What are the estimated quarterly tax deadlines in 2021?
So far, the IRS has not changed the regular federal income tax deadlines for 2021. Here are the estimated quarterly tax due dates for 2021:
- First quarter deadline: April 15, 2021
- Second quarter deadline: June 15, 2021
- Third quarter deadline: September 15, 2021
- Fourth quarter deadline: January 15, 2022
Corporations will pay their estimated quarterly taxes on the 15th day of the 4th, 6th, 9th, and 12th month of their fiscal year. That means that if a corporation follows the calendar year, their dates will be the same as in the individual deadlines, except for the fourth quarter.
Can I file for an extension for quarterly taxes?
In rare cases when the IRS does allow extensions, these generally apply only to the paperwork. An extension will give you more time to file your tax return, but it will not change the due date for your actual tax payment. Because your quarterly tax deadlines do not necessarily require paperwork, there is no regular extension available.
However, don’t hesitate to file for an extension if you need more time to complete your tax return. The regular tax return filing deadline is April 15, but you can easily file an extension to extend your due date six months to October 15.
Keep in mind that the IRS may rarely offer broad extensions on quarterly tax payments because of extenuating circumstances like the COVID pandemic, but these situations are very uncommon.
What happens if I miss a quarterly estimated tax payment?
If you realize you’ve missed a quarterly estimated tax payment, make plans to pay it as soon as possible. You might end up being fined for your late payment, so the safest thing to do is to make the payment as soon as you remember.
Some might assume they can pay multiple quarters at once or even wait until the end to pay it all. However, any payments made later than the quarter they correspond to may be subject to a fine.
Can I skip an estimated tax payment?
The IRS requires regular tax payments throughout the year. Skipping an estimated tax payment is only a good idea if you’ve already paid enough in estimated taxes with your previous payments.
If you will owe less than $1,000 at the end of the year, or you’ve already paid nearly all of what you owed in the previous year, you might be able to avoid making estimated tax payments.
What is the penalty for not paying estimated taxes?
The IRS applies a financial penalty for underpayment of estimated tax. This would be added to what you owe when you file a tax return. The less you pay in advance, the greater the fine.
How can I make quarterly tax payments easier?
Quarterly tax payments don’t have to be stressful. If you put in the time at the beginning of the year to calculate your expected tax due and then keep to your quarterly payments schedule, you won’t have a problem.
Working with an accountant can help you develop a safe, reliable estimate of what you need to pay to avoid penalties. As long as you’re able to stay organized and keep up with your bookkeeping, you should be able to manage your quarterly payments. The process will also make it simpler when preparing your return at the end of the year.