How to Calculate and Pay Your Quarterly Estimated Tax

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Owning your own business has its perks.

The flexibility and personal fulfillment that comes from working for yourself is second to none.

One of the not-so-perky parts of running your own business is the quarterly tax payments that the IRS expects you to make.

Unlike the convenience of having tax payments deducted from every paycheck and sent to the IRS when you work for someone else, business owners are expected to send regular tax payments to the IRS every quarter, if the business income exceeds $1,000.

The IRS understands that paying a year of taxes in one lump sum is often a challenge, especially for new businesses.

To avoid becoming delinquent on income taxes when you own your own business, the IRS asserts that estimated tax payments are to be paid every three months.

It’s important to accurately calculate how much each tax payment should be.

If you underestimate your income and in turn, send in an insufficient tax payment, the IRS may impose a penalty.

This can be avoided by keeping careful and thorough records of your earnings and expenses diligently throughout the tax year.

Tax professionals recommend that businesses set aside a bank account for the sole purpose of making quarterly tax payments.

A good rule of thumb is to transfer 30 percent of all income transactions into this account.

As the balance of this account increases between tax payments, many have found that they’re tempted to use it in an emergency.

Resourcing finances to take care of emergencies should be exhausted instead.

Borrow money from friends or family or take out a bank loan. Operate your business as if this account doesn’t exist unless it’s time to pay your taxes.

This practice allows you to avoid significant financial losses in the form of penalties and interest for not making your tax payments on time.

These consequences are often much more significant than taxpayers anticipate.

The question now is, “How much should my quarterly tax payments be?”

Quarterly tax payments are calculated based on last year’s earnings.

To illustrate: if you paid $20,000 in taxes last year, save up enough every quarter to make a payment of $5,000 every quarter this year.

But, be careful;

If you have a better year than you did last year, the IRS will expect a quarterly tax payment proportionate with your projected earnings for this year.

For new businesses or freelancers with varying business volume throughout the year, the IRS offers another payment option that’s called the annualized income installment method.

This installment method allows you to calculate the tax that you owe at the end of each quarter and make payments for the specific tax that you’re liable for.

If you choose this method, include Form 2210 with your payment, to show the IRS your calculations.

Taxes due are largely dependent on the tax deductions that you’re eligible for.

Some of these deductions include advertising, insurance, office expenses, supplies, business travel, industry education and banking fees.

Deductions must be considered “necessary and ordinary” for a business in your industry and should be recorded carefully and thoroughly with the rest of your business records.

While they don’t play a role in making quarterly tax payments, they will be included on your Schedule C form when you file your yearly tax return.

The due dates for quarterly taxes are on or around the 15th of April, June, September of the current year and January of the following year.

The IRS accepts payment by check through the mail – be sure to include form 1040-ES or electronically from your bank account.

They also accept payment via credit card but charge at least 2 percent in processing fees.

Do you still have questions about making quarterly tax payments?

Check out our blog for more information!