Taxes are notorious for being a bit complicated, and when you own your own small business, they can get even more so. In comparison to income taxes, small business taxes are more of a “pay as you go” style system. To avoid penalties from the IRS, you may have to file your taxes every quarter for your small business.
If you need some tax preparation prep, look no further. Today we’re going over how to understand the quarterly taxes system related to small businesses and when they’re due.
What Are Quarterly Taxes?
Rather than paying taxes throughout the year, via an income tax, or annually like an individual, small businesses pay their taxes quarterly. Because there is no one keeping track of small business taxes, it is the small business owner’s responsibility to keep track of the related expenses and taxes they should pay.
A small business pays an estimated amount of taxes for each quarter of the year ahead of the annual tax return with quarterly taxes. These payments are estimated because they are taking place before the forms for an annual tax return can be prepared.
The United States requires that these taxes be paid throughout the year rather than annually because it creates a more structured, streamlined system. It allows for manageable installments rather than one large payment at the end of the year.
What Small Businesses Have to Pay Quarterly Taxes?
When it comes to paying quarterly taxes, most small businesses will have to make quarterly payments. Most small businesses need to pay quarterly taxes if they expect to owe more than $1,000 on their annual return. Most commonly, the following businesses and/or business owners will need to pay quarterly taxes:
- Self-employed individuals will need to pay quarterly taxes, whether they’re contracted or a single-owner business.
- Sole proprietors who own an unincorporated business on their own will need to pay quarterly taxes if they expect to owe more than $1,000 annually.
- Partners of small businesses will also need to pay quarterly taxes.
- S-corporation shareholders, as well as corporations, also fall under the small businesses that may need to pay quarterly taxes rather than annual taxes as well.
The Different Types of Business Taxes
There are a handful of different business taxes that you’ll need to understand to run your small business efficiently. Here are all of the types of business taxes you should be acquainted with.
- Employment Tax – Employment taxes are the taxes that are paid via employee paychecks or other federal taxes, such as Social Security, Medicare, and federal income and unemployment taxes.
- Self-employment Tax – Employment taxes paid by a self-employed business owner.
- Income Tax – These are the taxes paid on income that your business earns.
- Excise Tax – Excise taxes are only paid by certain businesses, such as those that deal with fuel and certain types of transportation.
- Sales Tax – Out of the 50 states, 45 have a state sales tax that must be taken into account and calculated when selling goods and services.
- Property Tax – Property taxes have to be paid on any property, land, or real estate that a business owns.
How Are Quarterly Taxes Estimated?
While quarterly taxes may seem a bit daunting, estimating your quarterly tax payments isn’t as difficult as you may think. If you’re expecting to earn a similar amount of money you earned the year prior, that’s a good place to start. That being said, if it is your first time calculating the taxes you’ll owe, follow these simple steps.
- Determine how much your total expected income will be for the year.
- Find your adjusted gross income, or AGI, by applying tax deductions to the total expected income.
- Using the AGI you just found, multiply it by the relevant tax rate to find your business’s taxes.
- Then, using the total expected income, estimate the taxes owed for Social Security and Medicare using figures for self-employment taxes.
- After finding your rates for self-employment taxes and the income tax owed, add them together.
- Take the total you’ve found, and divide by four. This is the amount you’ll pay each quarter of the year.
What Forms Do Small Businesses Need to File Their Taxes?
The forms used to file taxes for a small business are similar to that of the standard forms used for employees, the W-4. Depending on the type of small business you have, you’ll need to use one of the following forms.
- Corporations – Corporations will need to submit 1120-W forms alongside their quarterly tax payments.
- Individuals – Individuals are considered those that are self-employed, members of partnerships, as well as sole proprietors. They will need to submit their payments alongside a 1040-ES form.
- Limited Liability Companies – The process for limited liability companies, or LLCs, operates somewhat differently. They aren’t taxed twice like corporations; they file their business taxes on their personal taxes but have to file 1065 additionally for informational purposes.
Like standard income taxes, payments and forms can be submitted via mail or electronically. The process is fairly standard, like the annual income tax filing process, but must be done several times a year rather than once.
When Are Quarterly Taxes Due?
Quarterly taxes are due each quarter of the year on the same date. The first quarter of the year is from January to March, the second quarter is from April to June, the third quarter is from July to September, and the fourth quarter is from October to December. For each quarter, the payment is due during the last month of the quarter. The dates are as shown below.
- First-quarter deadline (January to March) – April 15
- Second-quarter deadline (April to June) – June 15
- Third-quarter deadline (July to September) – September 15
- Fourth-quarter deadline (October to December) – January 15
It is unlikely that the IRS will allow for an extension of the deadline for your quarterly tax payment, but they are flexible in terms of extensions for the paperwork surrounding your taxes. With the current events surrounding the COVID pandemic, some payment dates have been extended.
Missing a Quarterly Tax Payment
Quarterly tax payments have strict deadlines and due dates, and as such, payments cannot be missed without some sort of penalty involved. If you’ve missed a payment, it is in the best recommendation of the IRS to have the payment submitted as soon as possible.
If it is not, there will most likely be fines. While these payments are only estimates, and you may believe it possible to submit the payment for the entire year all at once, we’re here to tell you that it isn’t. If you expect to, you can also expect to pay fines and penalties, resulting in a much larger payment than if done correctly.
Circumstantially, quarterly tax payments can be skipped, but only if the annual estimated tax has been paid in full already. Payments for the previous quarters, or for the previous payment, must have satisfied the annual income tax as well as the self-employment tax. If you are unsure that these have been met, it’s best not to skip a quarterly tax payment.
Are There Exceptions to Quarterly Taxes?
Some small businesses may not need to pay estimated quarterly taxes. If an individual or a business expects or estimates to owe less than $1,000 in taxes for the year, then quarterly taxes may not need to be paid. Additionally, corporations may not need to pay quarterly taxes if they expect to owe less than $500 in taxes for the year.
Quarterly taxes for businesses seem like a complicated process, but they don’t have to be. The processes are fairly similar to that of personal income taxes, just done several times a year rather than once. Due dates for the quarterly tax payments are the same each year, and if payments are not made by the assigned due date, the IRS can penalize and fine your business. The paperwork, however, can be turned in late if need be, and extensions can be filed.
All of this revolves around your estimated annual taxes, as well as what kind of business you own. Some small businesses are subject to additional taxes based on the industry they are a part of. Quarterly taxes don’t have to be hard, and with what we’ve outlined here, you’re in good shape for making sure that its done on time, every time.