Quarterly Tax Payments – Paying quarterly taxes is one way to make sure you’re giving the Internal Revenue Service (and state) enough money during the year to avoid owing them a lump sum at filing time – or since they expect to be paid you might incur penalties and interest.
There are two types of quarterly tax payments:
- Employment/Payroll Tax Withholding – If you have W2 employees or are paying yourself through payroll, you have to pay “payroll taxes” on the money paid out. Thankfully the payroll provider (Gusto, ADP, Patriot Tax, etc.) is likely handling the quarterly tax payments for you, and so you shouldn’t have anything to worry about. Just make sure you signed up for the right service (some lower-tier payroll services don’t file on your behalf). Again, this piece should be handled by the payroll company.
- Income Tax – People with income (money earned minus expenses) are expected to make estimated tax payments throughout the year. It’s called estimated tax payments for a reason; there are so many variables that go into determining what your tax liability will be each year, that the best we can do is make an estimation of what to pay and adjust each quarter as new information becomes available.
WHEN?
Due dates are as follows:
- April 15 for earnings from Jan. 1 through March 31
- June 15 for earnings from April 1 through May 31
- Sept. 15 for earnings from June 1 through Aug. 31
- Jan. 15 (of the new year) for earnings from Sept. 1 through Dec. 31
Typically, the IRS only cares that the taxes get paid by April 15th of the following tax year. So it’s not the end of the world if you are a a few days late in meeting the deadline; it might just mean a tiny amount of interest owed if at all. We have many clients that chose to not pay any estimated taxes during the year, and instead save and hold on to their money until the latest possible time, when they are filing their taxes April 15. At this point they are paying a few hundred in penalties and interest, which they are comfortable doing (since they’ve saved thousands toward taxes during the year).
Be warned though, there’s a chance you get penalized if you wait this long. Additional food for thought, if you don’t somewhat stick to the above deadlines (of saving and paying quarterly), it’s going to stink writing a huge check to the IRS come tax time. State tax authorities, if you pay state taxes, might want their taxes due on time every time and have a worse penalty.
HOW?
There are a few options to figure out estimated taxes. We will focus on our preferred two options.
- Prior year tax return vouchers. Found in your last filed/completed tax return (if the preparer included it). It’s an OK estimate, as it’s based on last year’s activity. Nonetheless sufficient since the accuracy of your estimated taxes isn’t the focus, but just the act of saving and paying for taxes is the priority. Saving funds for taxes each month is hard enough. Example of what a voucher looks like below. You can see the due date, amount being paid, and which voucher it is (there are 4 vouchers provided in your tax return):
- 25% of net income (or 20% of revenue) calculation. For the quarter in question, you will want to find your net income for your business. That’s what you were paid by clients minus any expenses = net income or profits. So your appointment fees (revenue) minus outgoing money like rent, contract employees, utilities, and if you pay yourself as a W2 employee (expenses) equals net income. Note, if you pay yourself through owner distributions/draws (pulling money out as opposed to going through the payroll process), you include this as part of your net income; it too needs to get hit by the 20% estimated tax. Pull up a Profit and Loss statement for the quarter and multiply the net income listed at the bottom by 20%.
Please Note – 20% is about average of what our clients pay. We have clients paying anywhere from 15%-35%. The lower % the higher the chance you will owe a small amount upon filing your tax return next year. The higher the %, the higher the chance you would receive a refund upon tax filing. Feel free to set the % to your preference. I think it would be fair to say S Corps should be setting aside 15-20%, while sole proprietors should set aside 20-25% (sole props have to account for self employment taxes). And for states, 5-10%. Pick something and adjust the following year depending on how your tax return shakes out.
WHERE?
Two options can be found at https://www.irs.gov/payments
- Preferred Option – Direct Pay is designed to handle payments of personal income tax only. The service does not require registration so you can use Direct Pay straightaway, but you’ll have to enter in your information each time you want to make a payment. Takes no more than 5 minutes once you get the hang of it. Be sure to pay using your SSN, not your EIN; no matter if you’re an LLC, non-LLC, Sole Prop, or S Corp.
- The Electronic Federal Tax Payment System, or EFTPS for short. It can take a few weeks to get fully registered with the service, but you can schedule estimated payments from your checking account very quickly once you’re set up. EFTPS users can print out a report showing all their estimated payments for the year, which is a handy report to have at tax time. Simply log in to EFTPS to pay your estimated taxes and schedule a payment. You can indicate the dollar amount and the date you want the payment withdrawn from your bank account.
Third option – Mail in a check. Paying estimated taxes by check is pretty easy. Just make sure to use the 1040-ES payment vouchers. Make the check payable to the “United States Treasury.” In the memo field of the check, be sure to write your Social Security Number and indicate the year for which you are paying, for example, “2019 Form 1040-ES.” Each voucher has instructions and an address to send payment. Make sure to save a copy of the receipt for reference at tax time. Pay from your personal bank/credit card account, not your business’s (although you can). Technically it’s you who is liable for the taxes, not your business. In the perfect accounting world, you will disburse/draw/pay dividends from your business to your personal account, and use that money to pay the taxes. If you have done otherwise, that’s OK, we can make it right on our end with a couple clicks of the button. State Estimated Taxes – Most states follow the IRS‘s schedule, but the specifics of handling these differ state to state. If you are new to this process, please reach out
