Calculating and paying quarterly taxes may not be fun, but it provides you a chance to check on the health of your business. The IRS considers taxes to be paid as you go and requires everyone to pay toward their tax liability throughout the year as income is earned. Employees do this through automatic withholding, which the employer pays to the IRS.
Unlike employees, businesses and the self-employed are not subject to those withholding requirements. Instead, they are required to estimate their tax liability and make quarterly payments toward it. Upon filing an annual return, any amount still owed is paid, and any overpayment is refunded.
Do I need to pay estimated quarterly taxes?
You need to pay estimated quarterly taxes if you meet both of the following two conditions:
- You expect to owe more than $1,000 at year-end ($500 for corporations), even after accounting for any withholding and refundable credits.
- Your withholding and refundable credits are less than the smaller of 90% of your current year's tax liability or 100% of your previous year's tax liability (110% if your adjusted gross income exceeded $150,000 or $75,000 for married filing jointly).
This means if you expect to owe less than $1,000 after withholding and credits, you can stop right here. If you expect to owe more, but your withholding and refundable credits were equal to 90% of your current tax liability or 100% of your previous year's tax liability, you're also exempt.
If you owe more than $1,000 and your withholding and credits do not equal the necessary amounts, you need to pay estimated quarterly taxes.
You also don't need to pay quarterly taxes if you had no tax liability for the previous year, you were a U.S. citizen for the whole year, and your prior tax period covered twelve months.
When do I pay estimated quarterly taxes?
The first quarter of the year is considered to be January through March, the second quarter is April through June, the third quarter is July through September, and the fourth is October through December. Estimated payments are due according to the following schedule:
- April 15
- June 15
- Sept. 15
- Dec. 15 for corporations and Jan. 15 of the following year for individuals
If any due date falls out on a holiday or weekend, the deadline is pushed off to the next business day.
You can choose to pay at more frequent intervals if you find that more convenient, as long as you have paid the full amount due by each quarterly due date.
Bear in mind that even if you have paid in full by year-end or you are owed a refund, you will still incur an underpayment penalty if any individual payment is late or too small.
How do I pay quarterly taxes?
The first thing you need to do is estimate your current expected tax liability. This number divided by four equals your quarterly payment amount.
Of course, coming up with your tax liability can be a complex calculation, particularly if you don't earn income evenly throughout the year or if your business has changed significantly from last year.
Paying 100% of your previous year's tax liability is the “safe harbor" method if you are unsure about your current year's income. The IRS has a guide included with Form 1040-ES that can help you calculate your payment amount, or an experienced tax professional can help you arrive at your payment amount.
Once you have calculated your payment amount, you can pay online on the IRS website or through the Electronic Federal Tax Payment System. You can also send in a check or money order along with the vouchers included with Form 1040-ES.
What if I don't pay quarterly taxes?
Paying late, underpaying, or skipping a payment may cost you more in the future. Typically, any missed payment or short payment is assessed as a penalty that begins at 0.5% of the amount due, but the rate increases over time based on how long the bill was outstanding. Since interest begins to accrue only after the annual return due date, taking care of any penalties immediately minimizes interest and keeps the penalty rate down.
The exact formula used to calculate penalties for late or insufficient estimated quarterly payments is very complicated. You may refer to IRS Form 2210 and its instructions to see the actual calculations involved. While the possibility exists that figuring the penalty yourself may help to reduce the amount (due to having income earned at uneven periods, for example), the IRS is usually kind enough to calculate it for you.
Being on top of your quarterly taxes helps eliminate the chances of a large, unexpected bill at the end of the year. Getting it right from the start pays off.
Find out more about Business Accounting