Piles of money and a quarterly tax statement can seem overwhelming.

Quarterly Estimates

One of the most popular questions I receive as a tax preparer is “Do I have to start paying quarterly taxes?” The answer is, it depends. New entrepreneurs may have heard that they need to start paying quarterly taxes because they now operate a business, but that is not always the case, especially if you are a sole proprietor or a single member LLC. These entities are filed together with other joint family income and the whole income and withholdings will determine if more is owed. Even S-Corporations are added into the joint income through a K-1 report.

What are quarterly estimates?

Quarterly estimates are taxes paid to the IRS and to the state your business operates in. The best way to describe quarterlies is to take the example of a paycheck earner (W-2 employee). The employee receives a check from the company for their work less the taxes the company has withheld from the check. The company takes the amounts that are withheld and sends them to the IRS and state each quarter. The agencies are receiving the money throughout the year, not just in April. So of course, they want small business money throughout the year as well, hence the reasoning behind quarterly estimates.

What are Self-Employment Taxes?

Some business owners confuse estimated payments with self-employment taxes (SE). SE taxes are a combination of Medicare and Social Security payments. Profits in a business are subject to a 15.3% rate. The difference between businesses and employees is that the company employing the W-2 earner pays half of the SE where a small business owner pays the full amount. The small business owner can deduct half the SE tax to arrive at the adjusted income for taxation, but the full SE amount is then added onto the Federal tax required to pay and is a component of your estimated tax due.

Why do I want to pay quarterly taxes?

First, if you don’t pay quarterly taxes and you owe over $1,000 in April when you go to file, you will be assessed a penalty (except in the first year that you owe). Penalties are calculated on the amount of tax you owe and the length of time that it was not paid. The longer you go without paying, the higher the penalty will be. The IRS typically charges 0.5% of the total amount due as soon as you are late. Each month that your payment is not received, the penalty increases, up to a maximum penalty of 25%.

Second, it evens out your business cash flow. You are paying what is owed 4 times during the year and know what to expect instead of receiving a large tax bill in April that is due immediately.

Third, it is a sign that you are profitable in your business and you want to stay organized about tracking your finances, as well as not stressing about documentation at tax time.

Do I have to pay quarterly taxes?

Not necessarily. Here are some reasons you may not be subject to quarterly filings:

  1. Your business has not generated any profits.  Taxes are paid on profits (income less expenses), so if the business is not profitable, it is likely taxes are not yet owed.
  2. The joint filer with your business that is employed by a company may already be taking a high level of withholdings out of their paycheck which may offset anything owed by the business.
  3. The amount owed in taxes for the year is less than $1,000, which is below the threshold for required quarterly reportings and would not incur a penalty if not paid until the April filing deadline.
  4. There may be other businesses filing together that had losses that offset income earned in your business. Or you may have rental income losses that would offset income.

Advice from a CPA on quarterly taxes

Everyone’s situation is different. I’d advise talking to a professional if you are unsure or want more accurate numbers. Remember these are called estimates for a reason. They can vary.

I would advise against using the IRS calculation forms or trying to calculate what you owe yourself unless you are filing single and only have business income. Most of the calculators or forms are not considering if you are filing with a spouse (jointly) or other income sources (rental, dividends, etc) or deductions (child, energy, etc.) that may be involved. Since most small businesses are filing a Schedule C along with their individual return, there are a lot of factors that could change the numbers.