One of the most stressful things about running your own business or working as a freelance contractor is figuring out how to manage your federal taxes. Tax law is incredibly complicated, and many entrepreneurs starting out on their own might not realize the complexity or the risks of getting it wrong until they’re forced to start dealing with it.
Most people who don’t own a small business simply don’t have to worry about income tax until tax season comes around each spring. Your employer pays employment tax, where they pay the IRS directly on your behalf for federal income tax, Social Security, and other taxes. They withhold a small part of your income, and that goes toward paying your tax bill. Youwait to receive your W-2 and then file that as a part of your income tax return.
Employers essentially use your W-4 to assess your tax liability and account for taxes in the money they pay you. However, if you’re self-employed or own your own business, then it’s your responsibility to pay tax throughout the year.
The government expects you to pay taxes on your income as you receive it, and if you don’t have an employer to do it for you, then it’s up to you. You can’t simply wait until April to file your taxes and pay it all then. While it’s important for most taxpayers, staying on top of paying your estimated taxes is critical for small businesses.
What are Quarterly Estimated Taxes?
Paying your personal and business-related taxes as you go means making a tax payment every quarter based on what you’re projected to owe at the end of the year. Four times a year, workers or business owners that receive something other than a W-2 are expected to make a tax payment directly to the IRS, which effectively replaces the tax withheld for many individuals by their employers.
If you are starting or already own your own business, learning about various tax requirements is essential for understanding your tax burden and avoiding possible legal penalties and fees.
Estimated taxes apply to any kind of taxable income that comes to you directly without any tax withheld. That can include interest, stock dividends, capital gains and anything you earn through self-employment.
How are Estimated Taxes Calculated?
To pay your estimated taxes, you’ll need to make a prediction about your overall taxable income for that year. The goal is to estimate what your total tax liability is going to be based on your adjusted gross income, factor in any deductions you’re eligible for, and pay a fourth of that in each quarter.
You can start with your federal tax return from the previous year and use that as your starting point. Once you’ve added up all your taxable income, remember to factor in all possible deductions. Using a tax calculator can help you optimize your tax bill so you don’t pay more than is required.
Don’t worry if your revenue fluctuates unpredictably throughout the year. As you calculate your estimated tax burden each quarter, you can adjust your estimate according to how your earnings increase or decrease relative to your expected income.
When are the Due Dates for Estimated Payments in 2020?
Estimated tax payments to the IRS are due at four different points throughout the year, corresponding to the four quarters of the financial year.
For 2020, these are the deadlines:
- First Quarter due: April 15, 2020
- Second Quarter due: June 15, 2020
- Third Quarter due: September 15, 2020
- Fourth Quarter due; January 15, 2021
If your earnings predictions are reliable, you can also pay your estimates earlier, rather than later. As long as the payments aren’t late, they can be combined and paid together at an earlier due date. IRS form 1040-ES explains estimated tax requirements for individuals.
You can pay your estimated taxes online by electronic transfer, check, cash, or direct pay from a bank account. You can also pay what you expect to owe with debit or credit cards, but it will require paying an additional fee.
Is Paying Quarterly Taxes Mandatory?
Paying your estimated taxes quarterly is a requirement for most self employed individuals and businesses. That said, it might not be mandatory for you, depending on your circumstances.
The primary determining factor is how much you’re going to owe in total. If you will owe $1,000 or more on your tax return, including any estimated payments you’ve already made, then you must continue to make quarterly tax payments.
Maybe you’ve had an employer do some tax withholding for part of your income, but you’ve made other income as well. You do not have to make estimated tax payments if your estimated tax and tax withholding so far will make up at least 90 percent of the total tax you owe for the year.
You might also use your tax return from the previous year to gauge your liability. If you have already paid as much as the total taxes you owed last year, then you don’t need to pay anymore in advance.
However, if your income is higher, you will need to pay slightly more. If your adjustable gross income is over $150,000, then you need to have paid 110 percent of your previous year’s tax total in order to not worry about paying estimated taxes. If your filing status is married, but you’re filing separately from your spouse, then your taxable income only needs to be over $75,000 to make the higher barrier necessary.
What Happens if I Miss an Estimated Tax Payment?
If you’re required to pay estimated taxes and you miss a deadline, you should make the payment you missed as soon as possible. Don’t wait until the next deadline to pay them at the same time. If your payment is late, you might end up facing fines and tax penalties when you file your tax return at the end of the year.
If you don’t make sufficient payments throughout the year or on time, then an extra penalty may be added to what you owe on your tax return. That amount will depend on how much you underpaid and exactly how late you were with your payments.
Meeting Your Tax Obligations
The IRS isn’t satisfied receiving what you owe all at once at the end of the year instead of at the end of each quarter. Even missing a deadline by a few days can mean an extra fine. Understanding your tax obligations throughout the year can be difficult and stressful, but it’s necessary for avoiding extra fines and unnecessary complications.
If you’re worried about meeting the requirements, or you don’t have the time to do the work of figuring it out, consider getting help from a professional. Working with an accountant will help your business save money and avoid penalties, and it will leave you with more time to focus on the work your business really needs for getting ahead. Get help now!