The US tax system operates using a “pay-as-you-go” model. This means that taxes should be paid as you earn money, rather than at the end of the year as a big lump sum.
For employees, this is usually arranged by the employer as a deduction before you receive your pay-check so you don't really need to worry too much about the finer detail. For self-employed people however, this means you'll need to be estimating the tax you are likely to pay based on your revenue and expenses within the quarter.
The IRS expects all businesses that are likely to owe more than $1000 in taxes over the course of a financial year to file estimated taxes each and every quarter.
When are my quarterly taxes due?
Quarterly taxes are due four times a year for specific periods ("payment periods"):
|Payment Period||Due Date|
|January 1 – March 31||April 15|
|April 1 – May 31||June 15|
|June 1 – August 31||September 15|
|September 1 – December 31||January 15 2019|
The IRS says: If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that's not a Saturday, Sunday, or legal holiday.
Tip: Use a calendar app to set alerts for your quarterly tax - both for the due date itself, but also at least 3 weeks beforehand so you have time to get your numbers together.
How do I calculate my quarterly taxes?
The important thing to keep in mind is that your quarterly tax liability is considered an estimate rather than an exact amount. If you don’t have a good idea of your revenue and expenses this year to determine this number, your easiest option is to look at how much you owed last year and pay the same amount.
Whilst this is the easiest option, it isn’t often the best option. If your business is in a big growth phase, or sales are slipping a little lately then you may be overpaying or underpaying significantly.
Overpaying means unnecessarily tying up your revenue with the tax office until the end of the tax year - your money is going to sit in the big IRS piggybank until they eventually give it back to you at the end of the year as a refund. Given this is money you can't touch or use to invest in your business this may not be a great strategy.
Underpaying your estimated tax has it's own set of problems: the most obvious being that you'll be getting a nasty unexpected tax bill come April.
It’s therefore wise to try and estimate your estimate tax as accurately as possible to prevent these situations. If you are using bookkeeping software like Craftybase to track your revenue and expenses, then you’ll firstly want to be looking to obtain your raw numbers from here.
Essentially, you’ll be looking to establish your expected adjusted gross income, taxable income, deductions and credits for the year.
There are typically three steps required to calculate your quarterly estimate.
Step 1: Estimated Income Taxes Owed
To calculate this, you’ll need to multiply your total taxable income by the percentage indicated by your tax bracket for the year. This calculation results in your estimated income tax for the year.
Your tax bracket changes yearly, so ensure that you are referring to the latest rates - you’ll find this schedule in your Form 1040-ES.
Step 2: Estimated Self Employment Taxes
If you are liable to pay self-employment tax, you’ll also need to calculate this number.
Take your taxable income and multiply by 92.35% to arrive at your self-employment taxable income. Next, multiply this number by 15.3% to generate your self-employment tax rate.
Step 3: Quarterly Tax Payment
To calculate how much is due for the quarter, add together your income tax and self-employment tax estimates above, then divide this number by 4.
If you are calculating your estimated taxes for the first year, it is strongly recommended to run your numbers by a CPA before submitting.
How to file
This tax is filed using Form 1040-ES can be filed by mail or electronically.
To file by mail:
- Complete and print form 1040-ES
- Fill out the accompanying voucher
- Write a check for the amount you have estimated
- Send it to your nearest IRS address (as per the form).
To file electronically:
Use the Electronic Federal Tax Payment System (EFTPS).
Tip: Once enrolled to EFTPS, you can create automatic debits for regular payments. If your tax liabilities are constant this can be a great time saver.
The key is to ensure that youIf you don’t pay for 4 consecutive quarters, you’ll pay approximately 3% annual interest on what amount you have underpaid.
This will be calculated as part of your annual tax return.
Please note that tax laws change frequently. This information is for educational and informational purposes only should not be construed as tax or legal advice. Please consult a licensed financial expert in your area with specific questions or concerns.
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Topics covered include:
- Do I have to file if I’m just a hobby business?
- Common business structures
- Annual Income Tax
- Quarterly Estimated Taxes
- Sales Taxes
- State Income Taxes
- Bookkeeping Software
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