Q&A: Quarterly Taxes
August 3 2016
With the rise of the gig economy, we've had many clients asking if they need to be paying quarterly taxes. We've also seen clients who hadn't been paying their quarterly taxes and were shocked when it came time to file their tax return. Although it may seem a pain, and certainly something you'd rather put off and do once instead of four times a year, paying your estimated tax in quarterly payments is easier on your cash flow and saves you time at the end of the year. We've compiled a list of the questions we hear most often when it comes to quarterly taxes.
Who pays quarterly taxes?
According to the IRS guidelines, if you are a sole proprietor, a partner, an S-corp shareholder, or are self-employed, and you expect to owe tax of $1000 or more when your return is filed, then you'll need to pay quarterly taxes. If your business is a corporation, you'll need to pay quarterly taxes if you expect to owe $500 or more when you file your return.
How do I know how much to pay?
Some bookkeeping programs will help estimate your taxes for you. The IRS also provides worksheets to help you estimate your tax payments. Individuals, including sole proprietors, partners, and S corporation shareholders will use Form 1040-ES.
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. If you've been in business for at least a year, you can use last year's numbers to guide you. If you're just starting out, take your earnings from your best month so far and multiply by 12.
Corporations use Form 1120-W to figure estimated tax.
Do I pay the same amount every quarter?
That depends. If you have a quarter with a higher income than you usually expect, you should adjust your payment accordingly. Likewise, if you have a quarter with lower than expected income, adjust that quarter's payment by using Form 1040-ES.
Can I just pay in one lump sum once a year?
No. Just as when you were an employee and taxes were taken out of each paycheck, the IRS wants their share as you earn it. If you miss a quarterly payment, you will be required to pay interest and penalties.
I missed a quarterly payment. Can I wait until next quarter to pay it?
No. Pay it as soon as you remember and appeal any penalties.
I haven't received a 1099. Do I still owe quarterly taxes?
Yes. If you've earned any untaxed income, regardless if you've gotten a 1099 for it, you must report it.
What are the dates I need to remember?
April 18, 2016
June 15, 2016
September 15, 2016
January 17, 2017
If you file your 2016 tax return by January 31, 2017, and you pay the entire balance due with your return, you aren't required to make the fourth quarterly payment due January 17, 2017.
If you opt to mail your payment in, be sure it's postmarked on or before the due date. If the due date falls on a weekend or a federal holiday, the payment is due the next business day.
How should I submit payment?
You have a few choices here:
Sign up for the Electronic Federal Tax Payment System, or EFTPS.
Pay online at www.irs.gov/payments .
Pay by phone using a debit or credit card.
Send a check or money order using the estimated tax payment voucher.
Some tips:
- Set up a separate bank account to hold your estimated quarterly tax payments. Every time you receive a payment for your services, immediately transfer the estimated percentage into the account. If you do this with every payment, you'll stress less when it comes time to send it to the IRS.
- We recommend setting up notifications in your calendar right now and setting the reminder a week or two in advance so you'll be prepared when the due date arrives.
- Contact your accountant or CPA to assist you if you have questions.
As with many things in business, planning for quarterly taxes lessens their sting and leaves you with more time to grow your business.
Get In Touch