Paying estimated quarterly taxes four times per year may seem like a chore. But if you project these quarterly payments correctly, it can actually ease your tax burden come tax time. When tax season rolls around, you’ll have already paid your approximate tax liability.
In this guide, we’ll show you how to calculate and pay your federal estimated quarterly taxes, and walk you through an example that clarifies the process.
When to Pay Estimated Quarterly Taxes
Estimated tax payments are due four times per year, in April, June, September, and January.
Here are the estimated quarterly tax deadlines:
- For the period Jan 1 to March 31: April 18
- For the period April 1 to May 31: June 15
- For the period June 1 to August 31: September 15
- For the period September 1 to December 31: January 17
It’s a good idea to set these dates in your calendar at the start of every tax year.
How to Pay Estimated Quarterly Taxes
Getting your payment to the IRS is fairly straightforward: you simply need to fill out form 1040-ES and mail it along with a check to the IRS office closest to you.
Alternatively, you can pay online or by phone via the IRS Payments Gateway.
How to Calculate Estimated Quarterly Taxes
Unfortunately, knowing why you have to pay estimated quarterly taxes and figuring out how to submit them is the easy part. The hard part is calculating how much you should actually pay each quarter.
The first thing to consider is how much tax your business will owe at the end of the year.
If you intend to file as a sole proprietor, a partnership, S corporation shareholder, and/or a self-employed individual, you’ll generally need to make estimated quarterly tax payments if you will owe taxes of $1000 or more. Businesses that file as a corporation generally need to make estimated tax payments if they expect to owe $500 or more in tax for the year.
If you don’t meet these minimums, you’re off the hook. If you do need to pay estimated quarterly taxes, read on.
To calculate how much your estimated quarterly tax payments will be, first, estimate your expected adjusted gross income, taxable income, deductions, and credits for the year. One way to do this is to use your income, deductions, and credits from last year as a guide.
Once you have estimated these figures, it’s a simple matter of applying a few, simple calculations to figure out how much you’ll owe in your estimated quarterly tax payments. The Estimated Tax Worksheet found in Form 1040-ES will guide you through these calculations in detail.
Putting It into Practice
To make the process clear, here’s an example of how Stephanie, a sole proprietor, would calculate her estimated quarterly tax payments, based on her income tax and self-employment tax owed.
Let’s start with Stephanie’s income tax. In order to estimate how much income tax she will have to pay for the year, Stephanie multiplies her taxable income by the percentage indicated by her tax bracket for 2015. Tax brackets change each year, so be sure to consult the most recent numbers. This calculation gives Stephanie her estimated income taxes owed for the year.
Because Stephanie earned more than $400 this year, she will also have to pay self-employment tax. To calculate self-employment tax, she first has to multiply her taxable income by 92.5% – this is effectively her self-employment taxable income. She then multiplies this number by 15.3%, the self-employment tax rate. Now she also knows her estimated self-employment taxes.
Now, the final step. In order to calculate her estimated quarterly tax payments for each quarter, Stephanie simply adds together her income tax and her self-employment tax for the year and divides this number by four.
The Pain of Penalties
The IRS may impose penalties on quarterly tax payments for a few reasons:
- Not paying on time
- Not paying enough estimated tax for the year
- Paying too much estimated tax
There are a couple of things you can do to avoid these penalties: either at least 90% of what you owe in taxes this year, or pay the same amount (100%) of the taxes you owed last year, whichever is smaller.
Paying 100% of the taxes you owed in the previous year is sometimes referred to as the safe harbor rule. Even if your income grew this year, you will avoid penalties if you match the payments that you owed in the previous year (but you will still have to make up the additional tax payments).
One difference to note is that if your income is more than $150,000 per year, then you are required to pay 110% of what you paid in taxes last year in order to avoid underpayment penalties.
Paying taxes four times a year won’t be the most fun thing you’ll do as an entrepreneur, but proper preparation, organized small business recordkeeping, and tax-ready books will help streamline the task
This guide only covers federal taxes. If you live in a state that charges income tax, you may also need to set up quarterly state tax payments.