Quarterly Tax Basics
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Some of the most common questions I receive revolve around quarterly taxes. What are they? Do I have to pay them? How much do I pay? What happens if I don’t pay? And so many more.
Since I received these questions so much, I put together a few digital offerings to help go into depth on everything you need to know. However, I am aware that spending money when you are just starting out is often not feasible, so I wanted to give a brief overview of quarterly taxes here.
Corporations do pay the owners an actual paycheck, but that’s a conversation for another day and quarterly taxes may still be applicable!
Our tax system is a pay as you go system. This means that as you make money, the taxing authorities expect that you will be paying taxes on it. Said another way, you pay taxes as you receive your income.
This is why when you work for someone else and receive a paycheck you have money taken out for withholdings each pay period. The withholdings tend to cover federal income tax, social security, medicare, and sometimes state income tax along with a few other smaller taxes.
Most business owners do not pay themselves a paycheck, so they do not pay the taxes as they are making money. By default, they are not contributing money to social security, medicare, or paying their income taxes throughout the year as employees do.
While this is not the only reason quarterly taxes were created, I do believe it is one of the biggest reasons. The various taxing authorities created quarterly taxes to give the ability to pay taxes throughout the year and allow for the pay as you go system to work for those without paychecks.
Note: Taxing Authorities refers to the IRS and state government(s) you have to pay taxes to.
Do I have to pay?
Maybe! As it goes with tax law, it depends a lot on your specific situation and what your numbers look like, but the IRS does give a guideline for us to use.
If you will owe $1,000 or more in taxes at the end of the year, then you should pay in quarterly. Looking at your most recently filed tax return can give you some insight on if this is something that is likely to happen, unless you expect to have a drastically different year this year.
Pull out your most recent tax return and look for a few numbers. You will want the total taxes owed and the amount of taxes you paid in through W2s and 1099s. Do not include any estimated taxes you paid last year or any withholdings for jobs you no longer have. Find the difference between the taxes owed and the taxes paid in through W2s. If this exceeds $1,000, then you are likely going to need to pay in quarterly.
In my Conquer Quarterly Tax Course, discussed at the end of this post, I include a spreadsheet to help you calculate whether you will meet the $1,000 threshold.
Even if you do not hit the $1,000 threshold, you may prefer to pay in quarterly so you don’t have to worry about paying a large lump sum at the end of the year and that’s totally okay! I don’t think any taxing authority will be upset if you decide to pay quarterly when you don’t have to!
Note: Expect to have to pay in quarterly if you have about $7,000 in net income with your business!
When you reach about $7,000 in net income from self-employment, you will then meet the $1,000 threshold and need to pay in quarterly due to self-employment taxes.
Self-employment taxes are one of the most surprising things that business owners stumble upon. It doesn’t matter if you don’t owe any income taxes, if you have a net income with your business, self-employment taxes will be calculated and owed.
Calculating Quarterly Taxes
When you are calculating how much to pay in for quarterly taxes, it is important to remember that the amount you pay in is based off all taxes you are responsible for; such as income tax and self-employment tax.
Thus, when determining how much to pay in, you have to consider and calculate self-employment taxes, income taxes, and any other tax you might be responsible for.
To get started, you may decide to consider only your self-employment taxes. In this case, you will take your self-employment net income for the year, multiply it by 16% (.16), and then divide by four (4).
Net income of $12,200
12,200 * .16 = 1,952
1,952 / 4 = 488
Each quarterly tax payment might be $480-$500.
This is a very rough starting point for quarterly taxes, but it can do the trick while you are getting your business up and running. Remember it does not include all of your income or any other taxes you might be responsible for; such as income tax.
To help you calculate a more accurate amount of estimated taxes you should pay in, the IRS created a form to help, you can click here to access it.
Don’t forget to consider your states as well! States that have an income tax will generally require quarterly tax payments. Some follow the IRS guidelines with the $1,000 threshold and some have their own rules. Your state taxing authority likely has information along with a form to help you calculate the state estimated taxes. Try Google searching “STATE estimated tax form” to find something to help!
Total Taxes Owed
2019: Box 16
2020: Box 24
Total Taxes Paid
2019: Box 17
2020: Box 25d
Adjusted Gross Income (AGI)
2019: Box 16
2020: Box 24
+ The image to the left shows a Google search in which I looked for a form to help me calculate Oklahoma’s estimated taxes.
+ The search field says “Oklahoma estimated tax form”
+ The second result says “Oklahoma Individual Estimated Tax – Oklahoma.gov” and the link says it is a PDF.
This is the link I chose and it took me to what I was looking for!
I understand that the various taxing authorities’ forms may not be the easiest to understand. I have an entire module available in my Conquer Quarterly Tax Course dedicated to help you calculate your estimated tax payments. I also decided to offer that Module 2 separately for those only interested in the calculation. Click this link to check out the options at the bottom of this post.
Making Quarterly Tax Payments
After figuring out the amount of taxes to pay in, the next thing you need to know is when to pay the taxes. The taxing authorities all tend to use the same due dates for quarterly tax payments, but definitely check with your state to verify!
The due dates for each of the four quarterly taxes are listed below:
Quarter 1: April 15, 20×1
Quarter 2: June 15, 20×1
Quarter 3: September 15, 20×1
Quarter 4: January 15, 20×2
Quarter 1 – Quarter 3 is paid in the current year whereas Quarter 4 is paid in the following year.
There are a few different ways to go about actually paying your quarterly taxes. All taxing authorities will accept payment through the mail and if you prefer this method I will strongly encourage you to send the letter with your payment inside certified, especially with a signature required, as proof of receipt. This means that they will have to sign saying they received your letter and the signature will be sent back to you to keep in your records.
The more popular method of making payments is to do so through an online portal on the taxing authorities’ website. For federal purposes, you can go to this link to pay online but you will need to search payment options for your state via Google. I would put in something like “STATE estimated tax payment” and find a result that mentions payments on your state’s .gov website.
When using the federal portal, it will ask you a series of questions to help identify you so the payment will be applied to the right account. It will also ask you the type of payment you are making. Selecting the type of payment was something I noticed a few people were uncertain of, so I uploaded a screenshot below to help you fill it out.
Reason for Payment: Estimated Tax | Apply Payment to: 1040ES (for 1040, 1040A, 1040EZ) | Tax Period for Payment: Current Year
What if I don’t pay?
If you don’t pay and you should have, then there will be penalties and interest applied at the end of the year. If you don’t pay and you didn’t have to pay, that’s fine! No worries.
The penalty, generally, will be applied based on two factors: how much you owed and the payment dates. First they calculate how much you should have paid throughout the year for each of the quarters. They compare this to how much you actually paid throughout the year. Then they compare when you actually made the payments to the dates those payments were due.
If you have an experience where you paid in less than you should have and/or you made your payment after the due date, you will have penalties and interest applied to your account. The IRS makes this calculation for you and, in some cases, the calculation is quite complicated.
There are options for reducing the penalty, if you were to receive one. The most commonly used option is called the Annualized Income Installment method. What this does is it looks at your money broken down by quarter and calculates your quarterly tax payment based on the quarter. This is really beneficial if you received a large chunk of money towards the end of the year vs receiving the amount throughout the year.
Wrap it up
Quarterly taxes are just one of the many areas of business that we get to consider as a business owner. It can feel super overwhelming at first, but it isn’t bad (I promise!) once you understand what’s going on and why.
This is why I put together a few offerings to help you in the area you struggle with the most.
I’ve taken my offerings off this post until I have moved them to my new hosting platform, redo the pricing, and are ready for them to up again. Thank you for understanding!
Use the box below to leave any questions, comments, or feedback you have!