September is Tax Time: Understanding your Quarterly Estimated Taxes
If you run your own business or are otherwise self-employed, chances are you’re required to pay quarterly estimated taxes. Instead of having a certain percentage withdrawn from each paycheck for taxes, you’re responsible for saving and paying the IRS at intervals throughout the year. This can seem like a confusing and frustrating process, but it doesn’t need to be!
If you are self-employed, a sole proprietor, a partner or an S-corporation shareholder, you may need to pay quarterly taxes. If you anticipate owing more than $1,000 in taxes at the end of the year, you definitely need to make quarterly tax payments. Form 1040-ES will help you determine and pay any taxes that may be owed.
Quarterly estimated tax payments are due on the 15th day of the months of January, April, June and September. Even if you expect to receive a refund at the end of the year, it’s still crucial to make your quarterly tax payments on time. If you don’t, you could face a hefty penalty by the IRS.
You will also face penalties if you miss any of the quarterly estimated payment due dates. It’s not okay to save up and pay your taxes as a single payment at the end of the year. If you do this, you may be subject to additional penalty fees and interest. Do your best to pay on time every quarter to avoid pointless penalty fees.
Begin by taking a look at last year’s tax return and estimating what you expect to make in the current year. Each quarterly payment should be roughly 30% of your taxable income for the previous quarter. Keep in mind that depending on your state, you may need to pay quarterly state taxes as well.
It can be difficult to save 30% of everything you make, especially if you’re a freelancer or small business owner with revenue that continually fluctuates. Even if you’re unable to pay the total amount due each quarter, it’s advisable to pay as much as you can. IRS penalties may be avoided if at least 90% of the monies owed have been paid throughout the year.
It’s better to overestimate your annual income than underestimate it. In your first few years of business, it may be difficult to see a growth pattern when it comes to your revenue, so err on the side of caution and assume you’ll make slightly more this year than you did last year. If something amazing happens and you experience exponential growth, you can make adjustments to your quarterly taxes by filling out a new 1040-ES form.
A good way to ensure you have enough saved to make quarterly estimated tax payments is to open a separate savings account specifically for tax payments. When you receive money from a customer or client, automatically transfer 30% of that payment to your tax savings account. It may not be fun, but you’ll be glad you paid on time when your refund arrives! Also, don’t forget to track receipts and expenses throughout the year so you’re always prepared come tax time.
What questions do you have about quarterly estimated taxes?