What you need to know
While most employees file taxes once per year, as a small business owner, you’ll be expected to deal with the IRS four different times per year.
The IRS expects you to pay your taxes as you earn your money. This is considered a “pay-as-you-go” system of taxes. If you’re an employee or a recipient of government funds (like Social Security), you’ll have your taxes withheld before you receive any funds. If you run your own business, though, you’ll likely need to make estimated tax payments.
In this article we explain who needs to make quarterly estimated tax payments, how to calculate how much you owe, and the payment deadlines.
What are estimated tax payments?
Individuals who run small businesses, including gig workers, independent contractors, and freelancers, are responsible for handling their own tax obligation, and that means paying the IRS your anticipated taxes throughout the year. These anticipated taxes are known as estimated tax payments, which are calculated estimates of your tax obligation based on what your business has earned in the previous quarter.
Estimated income tax payments are sent to the IRS throughout the current year in anticipation of the year-end tax filing. If you fail to send estimated payments by their due date, you may be subject to fines by the IRS.
But if you calculate correctly and make your quarterly payments on time, you may be able to file your year-end business taxes without a steep tax payment due.
Who needs to make estimated quarterly tax payments?
If you don’t have taxes withheld from your paychecks, it’s up to you to withhold them on your own (remember, the IRS expects everyone who makes money in a business to pay taxes). If you owe more than $1,000 in taxes, you will likely need to make estimated quarterly tax payments.
It’s worth noting that taxpayers can pay their taxes throughout the year in multiple ways. If you have multiple income sources, you may have tax withheld from one job but need to pay estimated taxes for another. Your assigned Bench Tax Advisor can help you find a way to simplify and balance your tax obligation across your multiple income streams.
A second important note is that you don’t have to pay quarterly taxes if you don’t make any money in that quarter. For example, filers with a small business that is only profitable in November and December have no need to make quarterly tax payments for any period other than the fourth quarter of the tax year.
Another exemption is those who do not earn any income over a calendar year if you also had no tax liability in the previous year, according to the IRS, there is no need to file or pay estimated quarterly taxes.
Estimated tax payment deadlines
Estimated tax payments happen four times per year. See the dates for estimated tax payments in the table below.
Note: Due dates that fall on a weekend or a legal holiday are shifted to the next business day.
You may be able to skip filing and paying the estimated tax payment due on January 15 if you have filed your annual tax return and paid your full obligation by the 15th. There is no need to make two payments in the same month. Those who are filing income taxes in March or April should make the fourth estimated tax payment by January 15.
How to calculate estimated taxes
If you’re a subscriber to Bench’s Bookkeeping and Tax plan, your Bench Tax Advisor can help you calculate your estimated quarterly tax payments so all you have to do is file the payment vouchers provided.
If you need to calculate how much you’ll owe on estimated taxes, you’ll start by tabulating how much you’ll owe for your total tax liability this fiscal year. Granted, if you’re doing this correctly, you’ll only be a few months into the year you’re paying for, so you’ll need to project and estimate a bit to find a reasonable number.
Don’t worry if you over or underestimate when you file your first quarterly tax payment at the beginning of the fiscal year. You can simply fill out a new tax form with an updated number and file again with a more accurate amount for your future payments.
To get a rough idea of the estimated tax amount you’ll be expected to pay, you may use Bench’s quarterly tax calculator. But we recommend using the IRS forms for calculating your actual payment amount.
If your business files taxes as sole proprietorship, partnership or S corporation, you can use the IRS’ Form 1040-ES to calculate your estimated taxes.
If your business files taxes as a C corporation, use the Estimated Tax Worksheet in Publication 542 to determine your estimated taxes.
How Bench can help
The fiscal year moves quickly when you’re caught up in the day-to-day tasks of running operations. If you’re not keeping an eye on dates and figures, you can feel a bit gobsmacked when you look up from making money and realize that it’s time to send a healthy chunk on to the IRS. You might even feel a bit worse if you’re not keeping finances organized and managing your books and you’re not entirely sure how much money to send as your quarterly tax payments.
But fear not—your Bench Tax Advisor is here to help with your estimated tax payments. Plus, Tax Advisors are available year-round and consultations are unlimited. We answer questions about tax savings, deduction limits, entity reclassification, and (most importantly) help you stay in compliance with the IRS.
How to pay estimated taxes as a pass-through entity
To pay your estimated taxes, sole proprietorships, partnerships and S corporations need to file a 1040-ES form with the IRS. You can send in the completed form by mail along with a check or money order, or you may file and pay your estimated quarterly taxes online or through the IRS2Go app. The IRS outlines the entire process for the Pay As You Go system to help small business owners and freelance or contract workers understand how to make their mandatory quarterly payments.
The 1040-ES form includes the calculation form with three additional payment slips that will be submitted alongside your estimated tax payments. There are three slips present for the last three quarters of the fiscal year. The first quarter is paid when you file the original 1040-ES document.
Need help completing the IRS 1040-ES form? We have detailed instructions on how to fill in and file the 1040-ES form here. You can also reach out to your Bench Tax Advisor for extra help.
How to pay estimated taxes as a C corporation
If your business files as a C corporation, use the Estimated Tax Worksheet in Publication 542 to determine your estimated taxes. Payments can be made through the IRS' Electronic Federal Tax Payment System (EFTPS).
What happens if I miss the filing deadline?
Running your business means meeting deadlines, and the IRS expects no less. The deadlines for filing quarterly tax payments are strict and extensions aren’t allowed. If you want to make sure you make your tax filing deadlines, you should consider paying your small business taxes online for easy documentation as well as tax confirmations and receipts.
But what happens if you miss a payment, or if, despite your best intentions, you accidentally make a gross miscalculation? Unfortunately, you can be hit with a penalty if you miss the deadline or don’t withhold or pay the right amounts. According to the IRS, you can expect to pay 5% of the unpaid taxes every month if you fail to file. Penalties accrue up to 25% of the unpaid tax amount.
Fortunately for the smallest businesses, the penalty doesn’t kick in unless you owe more than $1,000 in tax. You can also avoid an IRS penalty if you pay 100% of the tax your business owed in the previous year as estimated taxes for this year.
If your gross income is greater than $150,000, you can skip potential penalties by paying 110% of your previous year’s obligations as your current year’s estimated payments.
Start planning now for a smooth tax season
You’d be hard-pressed to find anyone who likes paying taxes. But like them or not, tax payments are very much a part of running a small business. Fortunately, with an understanding of the tax system and tax credit or deduction possibilities, you may be able to minimize your tax obligation every quarter and keep more money in your pocket.
You have options when it comes to the best way to file your taxes. But your first step is to stay aware of the deadlines so that you can plan your estimated tax payments correctly, stay compliant with the IRS, and enjoy the successes that come with your hard work worry-free.