How Much Should You Pay in Estimated Taxes Each Quarter?

Do taxes make your head spin? Many people are overwhelmed at the idea of filing their taxes each year. It can be a surprise to new small business owners to find out that they need to make estimated tax payments throughout the year. If you don’t know a lot about accounting or tax law, it is essential that you have a trusted accounting team to offer advice and help you manage your tax obligations and deadlines every year.

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Here at Easier Accounting, our goal is to alleviate your stress about accounting and taxes. We know that you are carrying a lot of responsibility in the management of your company. We will gladly handle the financial arithmetic to free up your time. As a result, you can focus on business development, client relationships, and employee management—instead of worrying about expense accounts and accounting ledgers.

Estimated taxes are an important part of your financial strategy, to help you avoid unnecessary fees. Here is some information to help you understand more about what you need to do for estimated tax payments:

Withholdings vs. Estimated Tax Payments

As an employee, taxes are withheld from each paycheck, and the employer sends that money to the IRS. This process makes it possible for each individual to pay their taxes as they go, and often they get a tax refund when they file at the end of the year. Many employees know that taxes are taken out of their checks, but they don’t realize what happens behind the scenes to send that money to the IRS.

If you are self-employed, then taxes aren’t automatically withheld from your paycheck. You can expect that you will likely need to pay taxes at the end of the year. Many self-employed people need to make estimated payments throughout the year. Then, the final tax preparation calculation will determine the remaining balance, and you will either need to pay the difference, or you will receive a tax refund.

Should You Be Paying Estimated Taxes?

Estimated taxes are based on your individual situation, so the best thing that you can do is talk to an experienced tax accountant to see if you need to make these payments. Successful self-employment usually requires estimated taxes to be made. These tax payments might also be necessary if you receive other income that didn’t have withholding, including alimony, gains from the sale of assets or stocks, dividends, or interest income.

For individuals, partners, sole proprietors, and S corporation shareholders, the rule is that estimated tax payments need to be made if you are expecting to owe $1,000 or more in taxes for the year. Corporations are required to make estimated tax payments if they expect to owe $500 or more in taxes for the year.

The rule is that you need to pay taxes as you go. So, if you receive any income that doesn’t have withholdings, then it is likely that you will need to make payments on that money.

There are several requirements that need to be met to determine if estimated tax payments are needed. Your accountant will evaluate your situation and then make recommendations about the amount of money that you should be sending to the IRS each quarter.

What Happens if You Miss Estimated Tax Payments?

If you fail to make the estimated tax payments that are required, you can expect to pay up later on. Not only will you have a big tax bill to pay when your tax returns are filed, but there is also a possibility that you might need to pay the penalty.

It is essential that you work with your accountant to calculate the correct amounts for your estimated tax payments. Whether your taxes are withheld, or you are making estimated payments, there is a penalty that could be charged if you have underpaid. This underpayment penalty can be avoided by using accounting software that will track your financial details and estimate the amount that you will need to pay in taxes.

How much should you be sending for your estimated tax payments? If you want to avoid an underpayment penalty, the safest option is to pay “100% of your previous year’s taxes.” This rule falls under the safe harbor requirement that is written into the tax law. If you satisfy this test, then you won’t have a penalty for underpayment, regardless of how much you owe on your tax return.

Do I Need to Make Estimated Payments on a Smaller Income?

What if your income went down this year? If you are expecting your overall income to be less this year compared to last year, you might consider paying 90% of the estimated tax bill. But, it is important that you work with your accountant to calculate this number so that you don’t drop below the 90% mark. In situations where you pay less than 90% of what you owe, you could end up with an underpayment penalty.

When your income goes down, your accountant can look at the numbers to determine the amount that you should be paying each quarter. If you prefer, you can choose to pay the full estimated amount, but you are essentially loaning your money to the IRS until you get a tax return after filing at the end of the year.

Who is Exempt from Estimated Taxes?

Do you meet all of the following three requirements? If so, then you may not need to pay estimated taxes:

  • You had no tax liability in the prior year
  • Your prior tax year covered a 12-month period
  • You were a resident or citizen of the United States for the entire year

If you did not have to file an income tax return last year and you met all three of the requirements above, then you likely will not need to pay estimated taxes.

If you own a small business and you are receiving separate wages or salaries at the same time, then you might be able to cover the estimated taxes through your paycheck withholdings. Talk to your accountant to figure out the right amount that should be withheld. Then, ask your employer to increase the withholdings on each check. You will need to fill out a new W-4 and enter the additional amount that you would like withheld.

Calculating Estimated Taxes

The easiest solution to calculate estimated tax payments is to have an accountant handle the details for you. It can be a complicated calculation if you aren’t familiar with the rules associated with figuring income, expenses, and tax law. This calculation is based on your expected gross income, taxable income, deductions, credits, and taxes for the year.

Many times, it makes sense to use the previous year as a starting point for the calculations. Your federal tax return can be a guide. From there, you can use the worksheet on Form 1040-ES to figure out the new estimated payments that should be made. These calculations should be adjusted if you estimate that your income this year will be higher or lower when compared to last year.

When Do Tax Payments Need to Be Sent?

Estimated tax payments have specific deadlines that need to be met. Your accountant will provide these dates to you, and you will need to make sure that the check is mailed and postmarked by the deadline. Keep in mind that you might need to pay the penalty if you don’t have adequate funds to pay the taxes by the due date, even if you will be receiving a refund at the end of the year.

The simplest way to make a federal tax payment is by using the Electronic Federal Tax Payment System (EFTPS). All federal tax expenses can be paid online using this system. You are required to send the payments on a quarterly basis, but you can choose to send payments more frequently if it is easier for you.

For example, some small business owners choose to send these payments on a weekly, bi-weekly, or monthly basis. If you choose these frequent payments, make sure that the totals add up at the end of the quarter. When you use the EFTPS system, you will have a record of all of the payments that were sent to ensure that you met the total quarterly requirements. You can choose to pay directly from your bank account online, or you might also use a credit card or debit card. When a card is used, transaction fees will be added to the total amount that is paid.

Other payment options include a same-day wire, money order, check, or electronic funds withdrawal that are completed during e-filing. If needed, you can also make a cash payment at designated retail partners listed on the IRS website.

Easier Accounting: Your Trusted Business Accounting Team

Here at Easier Accounting, we work hard to make sure that you are staying current with all of the tax deadlines throughout the year. If you are interested in learning more about the services that we offer, we invite you to contact us anytime. We would be glad to provide our accounting expertise to help you your company grow. Call us for more information: (888) 620-0770