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Did the title freak you out a little? Sorry about that, but we thought ripping the band-aid off would be the way to go. After all, it’s the truth – if you own your own business, freelance or generally work for yourself, quarterly estimated taxes are due to the IRS and, likely, to your state’s taxing authority right around the corner.
Did you forget about them, or have never dealt with them before? Don’t worry, we’re here to help. We’ll go over what QETs are, why you have to deal with them, and some of the basics of the process to get you started.
The Basics of Quarterly Estimated Taxes
Remember back when you had a 9 to 5 or even when you worked at that fast food joint downtown while you were in high school? At the end of the pay period your boss took out a certain percentage from every paycheck to pay taxes to the government. Afterwards you got to take home what was left.
Now that you own your own business, you don’t have a boss to do this for you. This means you have to do it yourself. However, it doesn’t quite work the same as it did back then. You don’t submit your taxes every two weeks or even every month.
If you own an (for example) online coffee cup shop, every time you sell a coffee cup you might think you need to submit taxes. But that would get even more complicated than it already is, which is why the QET system was set up.
Every quarter you send in a payment to the government to take care of your tax responsibilities. January, April, June and September become your “buckle down and take care of business” months from now on.
How QETs Work
So if you don’t remit tax payments every time you make a sale, how do QETs work? If it’s your first time ever doing them it can be extremely confusing, but once you get the hang of it everything will fall into place.
The biggest thing to remember is the word “estimated.” This is precisely what these payments are – estimations, as in you’ll hardly ever run into a payment that’s 100% accurate the first time. This is because you basically take your profit from the year (that’s income minus business expenses), figure out what you would owe on taxes on those sales, and then divide by four to get your quarterly estimated tax payment.
You can probably see how this would cause unbalance. You may make most of your profits in the 4th quarter, or you may shut your business down over the summer. Therefore, this “estimate” may be a little off.
Fortunately, there’s the “Safe Harbor Rule” the IRS has put into place. As long as you submit the same amount in taxes as you owed the the year before, you won’t be charged any fees or penalties. As an example, if you accumulated a $5,000 tax bill last year, but business boomed and you owe $10,000 this year, you’ll be fine as long as you pay at least $5,000 over the year in quarterly estimated tax payments. However, you’ll have to pay up the remaining $5,000 when all is said and done and you file your annual taxes on April 15th.
The good thing about this mess, though, is that it can help you get your finances in order as well as prepare you for tax season. When the time rolls around, you’ll be so used to figuring out this kind of stuff that it’ll be a breeze.
Here’s a calendar to keep you up to date:
Q1 – April 15, 2014 (you should have already paid this one on income made from January 1 -March 31, 2014!)
Q2 – June 16, 2014 (pay on income made between April 1, 2014 and May 30, 2014; this due date falls on the 16th because the 15th is on a Sunday)
Q3 – September 15, 2014 (pay on income made between June 1 and August 31, 2014)
Q4 – January 15, 2015 (pay on income made between September 1, 2014 and December 31, 2014)
What questions do you have about QETs?