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Small business taxes represent the money you pay to the government while running your business. All businesses must pay taxes on an annual basis, but many businesses must also pay quarterly taxes. For example, businesses with employees must file taxes on a quarterly basis with IRS Form 941 and self-employed individuals usually pay estimated taxes on a quarterly basis. Failure to pay these taxes in a timely manner can result in penalties and interest payments, so it’s crucial to understand the obligations for your specific entity type.
What Are Quarterly Taxes?
Quarterly taxes are periodic, estimated payments to the IRS made by businesses and self-employed individuals to cover income tax, Social Security, and Medicare. Quarterly taxes are based on an estimate of taxable income for each business quarter, so business owners still have to file an annual tax return like salaried employees.
As a self-employed individual, this tax is generally around 15.3% of your income. However, when you’re working for someone else’s company your employer is responsible for splitting the cost of these taxes with you.
When are Quarterly Taxes Due?
If your self-employed business owes income taxes of $1,000 or more or your business expects to owe more than $500 in business taxes for the year, you must pay quarterly taxes. These quarterly taxes are divided into four payment periods across the year for each corresponding business quarter. You can use the following chart to view approximate payment dates for each business quarter.
|For Income Received||Estimated Tax Due Date|
|January 1st – March 31st||April 15th|
|April 1st – May 31st||June 15th|
|June 1st – August 31st||September 15th|
|September 1st – December 31st||January 15th|
How to Pay Quarterly Taxes
In order to pay your quarterly taxes you will need to determine the following information about your business: gross income, taxable income, taxes, deductions, and credits for the year. As a guide, you can use the IRS 1040-ES worksheet for more information on how to calculate your estimated quarterly taxes.
1. Estimate Your Taxable Income and Income Tax
Use the following step-by-step guide to estimate your taxable income for the year.
- Step One: Calculate your income by taking your expected total revenue and subtracting ALL business expenses
- Step Two: Subtract any above-the-line deductions, such as interest on education loans, retirement savings, and health savings accounts.
- Step Three: Subtract the standard deduction. The final number after these steps is your taxable income.
- Step Four: Calculate income tax using your tax bracket for the current year, which is made available through the IRS.
Assuming all the calculations are done properly, the final number is your estimated income tax.
2. Calculate Self-Employment Tax
To calculate your self-employment tax, start by calculating your net earnings for the year, which can be done by subtracting your business expenses from your gross income. In general, 92.35% of your net earnings from self-employment are subject to self-employment tax. Once you’ve determined how much of your net earnings are subject to self-employment tax, apply the 15.3% to calculate your self-employment tax for the given quarter. This tax is a sum of a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings.
3. Divide Your Total Tax into Quarterly Payments
To figure out your quarterly payments, you must first figure out your estimated total tax. Do this by adding your estimated income tax from step one with your estimated self-employment tax from step two. After that, simply divide your estimated annual taxes by four. This final number represents the estimated quarterly payments that you must pay prior to each quarterly due date.
4. Send Your Quarterly Payments to the IRS
There are various ways in which quarterly payments can be sent to the IRS. You can send them through online payments, by phone (the Electronic Federal Tax Payment Service), with the IRS’s mobile app (IRS2Go app), or by cash/check. Remember that an annual tax return still needs to be filed, and estimated taxes can be adjusted per quarter based on business performance. Keep in mind that if you underpay your quarterly taxes, you will be hit with a penalty. For the first quarter of 2022, the interest rates for underpayment by individual taxpayers was 5%, but this number is subject to change each quarter. To avoid this penalty, the general rule is to have paid at least 90% of the tax for the current year, but this number is subject to change as well. For more information on the current rates you can visit the IRS website.
Who Qualifies for Quarterly Taxes?
Every business must file an annual income tax return, however, independent contractors and freelancers who expect to owe less than $1,000 in annual federal income taxes and corporations owing less than $500 in annual federal income taxes are exempt. Make sure to do your research and possibly consult a tax professional to determine if you are required to pay quarterly taxes.
Tips to Reduce Your Tax Liability and Simplify Tax Payments
Below are a few tips for reducing your taxable income:
- Contribute to a retirement account
- Stash money in your 401k
- Don’t forget about small business expenses
- See if you are eligible for Earned Income Tax Credit (EITC)
- Save for college
- Donate to charity
- Look into a small business loan, which is generally tax-deductible
There are many ways to effectively reduce your tax payments and maximize deductions, but we highly recommend working with a seasoned professional to maximize the amount of money you keep in your pocket. Different businesses and entity types have different expenses and deductions, so be sure to do your research.
Director, Marketing & Strategic Partnerships at Credibly