When you work for somebody else, your employer takes estimated income taxes out of your income. Then when tax season comes around, typically most, or all, of your tax burden has been paid through that withholding.
However, when you go into business for yourself, this is yet one more thing you'll have to keep in mind. The IRS requires business owners and self-employed individuals to pay estimated taxes throughout the year at the end of each financial quarter.
The U.S government requires those who are self-employed or who own businesses to pay a portion of the taxes they owe at set points throughout the year. Those are known as quarterly estimated taxes.
If you're running a business, you need to pay attention to your quarterly tax payments. Your income tax is due at the end of each quarter for the income received in that quarter. Because you haven't completed a tax return, you're only able to pay based on your estimate of what you'll owe at the end of the year.
Here is the deadline for the estimated taxes for each quarter:
Because of the Coronavirus pandemic, the IRS postponed the deadline for estimated tax payments in the first two quarters until July 15. The third quarter's estimated taxes are still due September 15, 2020, and the fourth quarter taxes are due January 15, 2021.
How do you know how much to pay in your quarterly tax payment? You can use the IRS form 1040-ES to put together your estimate. You can calculate it based on your projected total income for the year or use your exact income from the quarter.
If your income is likely to be the same as the previous year, you could also use last year's total as your estimated total. Either way, the goal is to calculate your expected total tax payment for the year, and then pay a quarter of it.
Remember that you have to pay not only income tax but Social Security and Medicare. The tax rates for Social Security and Medicare increase for self-employed individuals.
Don't hesitate to seek advice from a professional accountant when estimating your tax payments. If you spend more than you need to, you'll have less money to invest in your business, even if you get it back at the end of the tax year. Here are the necessary steps you'll follow:
You don't want to pay more than you have to. But there will also be problems if you end up paying less than 90% of your total taxes in advance. If you pay too little or too late, you could be subject to IRS tax penalties or fines. Even if you pay it all by April at the end of the tax year, the payments will still be considered late and treated accordingly.
If you miss a quarterly tax deadline, you should go ahead and make the payment as soon as you remember to avoid these fees. Failing to pay quarterly estimated taxes properly could also increase your chance of getting audited.
As you can see, you can't afford to put off preparing for tax day with a small business. Stay informed and on top of your tax obligations throughout the year.
Careful bookkeeping will help you handle these quarterly tax payments without a problem. Keeping track of your expenses will also give you a boost when claiming deductions and finding your taxable income. There's a lot to do, which is why experts recommend partnering with an accountant to ensure everything gets done.
Author Bio: 1-800Accountant's goal is to help new businesses grow. Our team of accounting professionals get small businesses started right by offering tax advice, bookkeeping, and payroll individually, as well as bundled together in convenient packages. Find us on Facebook and Linkedin.