f you’re self-employed or own a business, you’re typically on the hook for estimated quarterly tax payments. Generally, you’re required to pay estimated taxes if you expect to pay at least $1,000 in taxes for a given year.
Keep reading this tax guide to understand the ins and outs of estimated quarterly taxes, learn whether you need to pay them, and get tips for calculating your estimated tax liability.
What are estimated tax payments?
Estimated tax payments are a way to pay taxes on income not subject to withholding tax. You can make payments to the IRS in installments throughout the year instead of at the end of the year in one large lump sum. Essentially, estimated tax applies to income sources through business, rent, interest, dividends received, self-employment, etc. The amount of estimated taxes is based on a number of things regarding your personal tax situation, such as your income, expenses, tax deductions, and tax credits. The due dates fall every year in April, June, September, and January. Think of it as a pay-as-you-go tax system.
The pressure of determining your estimated taxes for your first year of business can feel daunting, but if your business expenses far exceed your profits, determining your taxes owed is vital to keeping your business on the right legal footing. On top of quarterly estimated taxes, other taxes you might pay are Social Security taxes and Medicare taxes.
It’s important to make your estimated tax payments on time. If you don’t pay quarterly taxes throughout the year for your business, you may be charged a penalty. This varies from state to state and depends on your AGI (Adjusted Gross Income). Paying your quarterly taxes on time is good for you and your business!
The rules for calculating estimated taxes can be complex and vary based on your state and business structure, among other factors, so we advise you to consult with a tax professional or the IRS for guidance on your specific situation.
Who needs to make estimated tax payments?
All businesses that make a profit need to pay taxes, but not every business and freelancer needs to pay estimated quarterly taxes. That’s why it’s important to know your state’s estimated quarterly tax regulations. Refer to the IRS’ list for each state’s tax revenues to find out if you are required to pay estimated taxes.
Here are the criteria that determine requirements for estimated tax payments based on business structure:
- Corporations, S Corporation Shareholders, & Partners: An estimated tax payment is due for every business ownership earning. A corporation, on the other hand, must pay estimated taxes each time the business is expected to touch $500 or more in tax liability.
- Self-Employed Individuals & Sole-Proprietorship Small Business Owners: Individuals that earn an income from their business are required to make an estimated tax payment each time their tax liability increases by $1,000 for the entire year. This rule of thumb applies to both full-time and part-time businesses and includes freelancers and independent contractors.
- Tax Defaulters from the Previous Year: If you failed to pay your due taxes last year or the amount withheld from your paycheck didn’t match the amount you were expected to pay, the IRS could flag you to make estimated tax payments this year.
It is important to check out your state’s minimum AGI of you or your business to check whether you are required to pay estimated quarterly taxes. You may find our local state guides to estimated taxes helpful as well: California and Virginia.
Getting this information right will help you avoid penalties and fines come tax season.
Who Is Exempt from Paying Estimated Taxes?
By and large, most business owners are required to pay taxes. If you receive salary wages, you can often avoid paying estimated taxes by requesting that your employer withhold additional taxes from their earnings. Anyone meeting all the following criteria can bypass estimated tax payments for the year:
- You have maintained the status of a U.S. citizen or resident for the entire year.
- The taxes you paid last year covered an entire 12-month period.
- You do not have any tax liabilities from the previous year.
- You are an employee.
Please consult with your tax advisor to determine whether you are required to pay estimated taxes.
How to calculate estimated quarterly taxes
Know your personal tax situation before calculating estimated taxes. Business owners should consider the following when filing their tax returns:
- Business expenses: Are there any business-related expenses that you can deduct? Did you go on any work-related trips or buy a new computer for your business? Keep these receipts and expenses in check for your tax return.
- Tax credits: You may be eligible for tax credits if your business offers perks like Paid Family Leave or Disability access for employees.
And don’t forget your employment taxes! Also called the payroll tax, it is paid for partially by any employees you have during the year in their payroll deductions and partially by you based on your employee’s wages at the end of the year. This is a tax specifically related to employing others for your business, making it something that a self-employed individual or regular employee wouldn’t have to worry about.
Based on your personal tax situation, and after taking into account your business expenses and revenue, you can estimate what you need to pay for your quarterly taxes. A simple way is to take what you paid in total taxes in the previous year and divide it by four to know your quarterly tax rate for the current year. You can even pay monthly, so it's easier to manage and you pay less quarterly. This way, you’ll follow the IRS’s rule to pay at least 90% income taxes including self-employment taxes in a given tax year so there will be no underpayment penalty.
Using tax tables or tax calculators
Online, you can find free tax calculators that can help you figure out what your quarterly tax payments should be. You can also use the worksheet in Table 1040-ES to estimate your quarterly tax payments.
Here is a tax calculator for your business that we recommend.
Adjusting for changes in income or deductions
Based on your income for the previous year, you can make an estimated guess for what you will owe in taxes for the coming year. If your business grows 15% year after year, you can calculate your estimated quarterly tax payments that way.
If you overpay for estimated taxes, you will receive that back in your tax returns.
As always, we recommend consulting a tax professional when calculating your estimated quarterly tax payments.
How to make estimated quarterly tax payments
Luckily, it’s fairly easy to make your estimated quarterly tax payments. Once you know what your quarterly amounts are, you can make payments via:
- Online through the IRS website
- IRS2Go app
- IRS Direct Pay
- The U.S. Treasury’s Electronic Federal Tax Payment System (EFTPS)
- Debit or credit card
- By mailing a check or money order
Remember, never send cash to the IRS. They will not accept it. If sending a check, remember to write your Social Security Number on it, as well as “Form 1040-ES” and the year the taxes are for.
For more information on how to make payments, the 1040-ES form is a great place to start. This form has clear instructions, a worktable for you to calculate your estimated quarterly tax payments, as well as the stubs that you can send in with your payments. It also has the addresses for you to send in your payments by check, depending on which state you live in.
Important due dates for estimated quarterly tax payments
Here are the dates for the 2023 tax year.
It is helpful to add these dates into your calendar so you know when they are coming up.
We recommend that you send your payments in (if doing so via mail) at minimum 7 days before the due date to avoid penalties for late payments.
Penalties for late payments
Unfortunately, the IRS may penalize those who underestimate their estimated tax payments. You may also receive a penalty if you sent them in late or for the wrong amount. You can even receive a penalty for overpaying. That’s why it’s important to be pretty sure, within reason, and maybe even consult a professional, before sending in your quarterly tax payments. In some cases, the IRS waives penalties. Refer to the 1040-ES form for details.
Should you hire help for your small business taxes?
Running a business requires all the help you can get. It’s never a bad idea to consult a tax professional for tax preparation help, especially while starting out. A good accountant or smart tax software tools can play a big role long-term, not only by saving you time and money through knowledge of tax rates and tax deductions but also by limiting your risk of liability.
If you don’t already, be sure to keep your business and personal finances separate. This is a key way to set up you and your business for success as you file estimated taxes each quarter. Learn more about Novo business checking and apply for a Novo account today.
Tips for staying on top of estimated quarterly tax payments
- Setting up automatic payments: You can set up automatic payments (one at a time) through the IRS Direct Pay website.
- Monitoring your income and expenses throughout the year: Make sure you are monitoring your income and expenses for the year. If your business halfway through the year makes a lot more money than you originally anticipated, mentally prepare to pay more in taxes. You may need to amend the remaining of your quarterly tax payments or you will have to pay a fine. Additionally, any extra expenses can affect your estimated quarterly tax payments.
- Set money aside for estimated taxes: Consider setting aside money for your estimated payments to ensure that you have the necessary funds when it’s time to file.
- Keep thorough records: Make sure you have detailed records of your income, expenses, and tax payments. Good bookkeeping will facilitate the filing process and ensure accuracy.
Estimated Quarterly Tax Payment FAQs
Q: Do I have to pay estimated taxes?
A: Depending on the state, your AGI, and your business, you may be required to pay estimated quarterly taxes. (This article shares state-by-state guidance for state estimated tax payments.)
Q: Can I pay estimated taxes at any time?
A: We recommend paying your estimated taxes up to 3-4 weeks before they are due. Any later could result in a penalty.
Q: What happens if I don't pay my estimated quarterly taxes?
A: You may be penalized or fined for missing, overestimating, or underestimating your estimated quarterly taxes. Don’t miss the due dates!
Q: How do I find out what my estimated quarterly taxes are?
A: A simple way is to take what you paid in total taxes in the previous year and divide it by four to know your quarterly tax rate for the current year. You may also want to consult a tax professional to help you with your estimations, use tax software, or check out some free online resources.
To recap, it’s very important to know whether or not you or your small business owe estimated quarterly tax payments. It may seem like extra work, but it can save you money and a headache later on. Don’t be afraid to ask a professional for tax advice if you’re unsure about any terms or forms you are filling out for your return. Better to be safe and pay more in taxes that you can later get back than to pay less in taxes and owe the government unknowingly!
You can always have someone prepare your tax return for you, but at the very least, a tax calculator and an estimate of your taxes for the year should be used to help you understand how to pay taxes as a small business owner.
Once you do it for a year or two, you’ll get the hang of it and it’ll be just another routine task for your small business.
This page is for informational purposes only and is not intended to be relied upon as legal, financial, or accounting advice. Please consult your own professional if you have any questions.