How Much to Pay, When to Pay, & How to Pay Your Quarterly Taxes (for Beginners)
As a bookkeeping business owner, I have paid quarterly taxes for over 10 years. In this article, I will share everything you need to know about paying quarterly taxes as a beginner.
If you are a bookkeeper helping clients, or a small business owner wondering about these things:
Who needs to pay quarterly taxes?
How much do you need to pay in quarterly taxes as a small business owner?
How do you avoid IRS fees?
When do you pay quarterly taxes?
How do you pay quarterly taxes?
How do tax brackets work?
I can help! I will cover each one of these questions for you, in hopes to prepare you for paying your quarterly taxes.
In this article, I am not giving legal advice, just sharing my experiences with quarterly taxes, so please consult with your accountant if you have specific questions or need advice based on your own business.
Watch the video here, or keep reading!
Who needs to pay quarterly taxes?
All small business owners who make $10,000 or more in annual net income need to pay quarterly tax payments to the IRS. These taxes will be submitted in four different payments and paid on specific due dates throughout the year.
If a business makes less than $10,000 in annual net income, it will not have to pay taxes quarterly. They will still be expected to pay taxes on their income, but the IRS allows the tax to be paid all at once at the end of the year.
If you are a W2 employee and work for a company, you do not need to worry about paying quarterly taxes. Quarterly taxes are only paid if you are a self-employed sole proprietor, LLC, or S-corp.
If this is your first year in business, you are probably wondering, “I have no idea if I'm going to make $10,000 in annual income this year.” In that case, do the best you can. Take each quarter as it comes, and evaluate the financial profit of your business.
How much do you need to pay in quarterly taxes as a small business owner?
If you had an income last year, your tax preparer will give you a piece of paper with an estimate on how much you should pay in each quarter this year. However, if you do not have a tax preparer or your business did not exist last year, you will need to calculate the amount you owe.
In the United States we have seven tax brackets, and you are required to give a percentage of your income to the IRS. The more you make, the bigger percentage you are expected to pay in taxes.
To estimate the amount you need to pay quarterly, you can use this simple formula.
In the example above, this business opened this year, and the owners are predicting they will make $10,000.
You will look at the tax bracket list (posted later in this article) and see that they are in the 10% tax bracket.
Take $10,000 x .1 (10%) to figure out that this business will owe $1,000 for the entire year in taxes.
Now that you know they owe $1,000 for the year, you divide that into 4 quarters. You then get the amount they owe per quarter: $250.
As the business makes more money, it does get a little more complicated, but as a general overview, I use this formula.
Fortunately, there are tax calculators available for you that will give you the most accurate information on what you owe. Here are 2 options: Tax Withholding Estimator and Quarterly Tax Calculator.
One last question I frequently receive from people regarding what they owe is, “What if I made $0 this year?” You then pay $0 in taxes. The taxes owed are a percentage of your income, and you don’t actually have to report your income to the IRS if you make $500 or less.
Remember, this is an estimated tax payment, so it is not expected to be 100% perfect. At the end of the year, everything is going to be evened out. If you paid a little too much, you will get money back, and if you didn’t pay enough, you will owe money at the end of the year. You don’t have to stress about it being perfect, as you are not easily going to be able to predict your future income.
RELATED: Saving for Taxes Calculator
How do you avoid IRS fees?
Don’t worry too much about IRS fees. I had one once and it was only $37. Yes, we want to be as responsible as possible, but likely the IRS fee isn’t going to put you out of business.
If you had an income last year and you pay at least 100% of the taxes you owed last year in this year's quarterly payments, you’re not going to be penalized. If your business has grown this year, and you’re going to owe more in taxes, but you’re not great at calculating it, just pay the same amount as you did last year and you will be fine.
Another way to avoid penalties is to pay on the due dates. Which leads to the next section of when to pay quarterly taxes.
When do you pay quarterly taxes?
These are the dates when quarterly taxes are due:
1st payment - April 18
2nd payment - June 15
3rd payment - September 15
4th payment - January 16*
* One thing to note about the final January payment is you can decide to pay the remainder of your taxes owed on January 16 or you can split it up and make the last payment in April.
How do you pay quarterly taxes?
Submitting your payment online is the easiest way to pay quarterly taxes. Go to the IRS website and create an account. Once you login, you will be able to make all of your quarterly tax payments there.
At the end of the year, your tax accountant will ask you what your quarterly payments were and how much you have already paid. If you set up this account, it will track all of your payment history.
If you don’t have an IRS account, you can also get a 1040ES form from the IRS website and mail in your quarterly tax with a check.
Some people ask, “Should you pay your taxes from your business or personal bank account?”
In most cases the answer is “it does not matter,” but make sure to check with your tax accountant. When I started my business, I had an LLC and they refer to this as a pass through. This means my personal taxes and my business taxes are the same.
If you pay your quarterly taxes with your business bank account, make sure to categorize the payment as an equity account in QuickBooks. This is your personal equity that is coming out of your personal money, not an expense from your business.
Another question people ask: “What if you’re a little behind on your quarterly tax payments or what if you want to pay ahead?”
In my experience either is fine. I have not found the IRS to be too picky, as long as you are doing your best to be honest and pay your taxes as accurately as possible.
How do tax brackets work?
As I mentioned earlier, in the U.S. we have seven tax brackets. Your tax bracket will depend on how much money you make. The percent you owe gets bigger as you make more money.
Be aware, if you are in one of the higher tax brackets, you are charged at multiple rates. Here is a graphic from NerdWallet, where they show you the math for a single filer. Go to this link on NerdWallet for all other filing statuses.
If your income is more than the first tax bracket, use the tax owed column as the starting point and add the remainder to it. Should your business fall into one of the higher tax brackets, hiring a tax professional to effectively handle your taxes will be worthwhile.
Disclaimer
In this article, I am not giving legal advice, just sharing my experiences as a bookkeeper with quarterly taxes, so please consult with your accountant if you have specific questions or need advice based on your own business.
