Benjamin Franklin said there were only two things certain in life: death and taxes. As a small business owner this is even truer. Most individuals in the US only have to file taxes once per year, but as a self-employed business owner, you will be expected to pay taxes once every quarter.
The IRS oversees the tax system in the United States which is a "pay-as-you-go" system. Employees will have taxes withheld prior to receiving any money whereas a business owner will most likely need to make estimated payments every 3 months.
In this guide we explain who needs to make estimated tax payments, how to calculcate your liability, and the payment deadlines.
Small business owners, gig workers (think Uber, Lyft, DoorDash), independent contractors, and freelancers are responsible for paying their own taxes throughout the year. This means esimating your tax obligation based on what your business has earned (revenue) ni the previous calendar quarter.
These estimated tax payments are sent to the IRS throughout the current year in anticipation of your year-end tax filing. Those who fail to send their estimated quarterly payments to the IRS, or those who do not pay enough throughout the year may be subject to a penalty[1]. This penalty can be avoided if you owe less than $1,000 in taxes after subtracting your withholdings and credits, or if you paid 90% of the tax for the current year.
A general rule of thumb is that if one does not have any taxes withheld from their paycheck then they most likely need to make estimated tax payments. The guidelines from the IRS state that individuals, sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe $1,000 or more in taxes when their return is filed.
It is important to note that if you do not make any money in the quarter then you will not have to pay any taxes. For example, if you are a sole proprietor that has $1,500 in revenue and $2,000 in costs for the quarter, then you would not have to file any taxes as you did not make any money during that period.
Estimated quarterly tax payments are due 4 times per year. The due dates are listed in the table below.
Important Note: If the due date falls on a weekend or a legal holiday, then the due date is shifted to the next business day.
Here are the basic steps you’ll need to follow to calculate your quarterly tax payments:
The fiscal year moves quickly when you’re caught up in the day-to-day tasks of running operations. If you’re not keeping an eye on dates and figures, you can feel a bit blindisded when you look up from making money and realize that it’s time to send a healthy chunk on to the IRS. You might even feel a bit worse if you’re not keeping finances organized and managing your books and you’re not entirely sure how much money to send as your quarterly tax payments in 2022.
But fear not—Millennial Financial Service is here to help with your estimated tax payments. We answer questions about tax savings, deduction limits, entity reclassification, and (most importantly) help you stay in compliance with the IRS.
