Paying taxes is an essential requirement for doing business anywhere across the United States. Ideally, every business should pay the exact amount they owe in taxes before or on the appointed date.
Some businesses are required to pay annual taxes, but most are required to make quarterly tax payments. Unfortunately, many new businesses usually don't know how and when to pay their taxes.
Do you know whether your business is required to pay quarterly taxes? Here is a comprehensive guide on how quarterly tax payments apply to businesses and everything you need to know to pay them.
What are Quarterly Taxes?
Quarterly taxes are estimated every three months or quarter-year. You pay quarterly taxes in advance of annual tax returns. They are also commonly known as estimated taxes because you are paying a quarter of your expected annual returns.
Essentially, the payments are a close estimation of a quarter of your yearly taxes. It is worth noting that quarterly taxes apply to most small businesses.
How Much are Quarterly Tax Payments?
Your business's quarterly tax payments will depend on its income. There are different methods of calculating your estimated taxes.
The easiest method involves calculating the estimated taxes based on your business's past year's annual income. However, this method only applies if you are sure that your business will earn the same income as the previous year – ideally, it applies to businesses with fixed or consistent long-term income.
The second method involves calculating the estimated taxes based on your business's quarterly income. This method applies to businesses and startups with wildly varying annual incomes. Here is a step-by-step guide on how to calculate your business's estimated taxes based on this method:
- Step 1: Calculate your expected annual income.
- Step 2: Calculate the Adjusted Gross Income (AGI) by applying tax deductions.
- Step 3: Calculate the estimated income tax owed by multiplying the AGI by the current tax rate.
- Step 4: Use the expected annual income also to calculate the self-employment taxes owed for Medicare and Social Security.
- Step 5: Calculate the sum of the estimated income tax and self-employment taxes to determine your estimated annual taxes.
- Step 6: Divide the estimated annual taxes owed by four to determine your business's quarterly tax payments.
These calculations often prove complicated for startups and businesses with complex income models. Seeking professional accounting for startups can help you avoid making costly errors.
Who Should Pay Quarterly Taxes?
Essentially, every business (or individual) that files and pays federal income taxes must also pay quarterly taxes. Overall, businesses that fit into the following categories need to pay estimated taxes:
- Sole proprietors.
- Self-employed individuals.
- Partners.
- Corporations.
- S-Corporations shareholders.
Does your business fit into one of these categories? If you’re not sure, consult a professional to make informed taxation and accounting decisions. It is also worth noting that employed individuals with businesses on the side also need to pay separate quarterly taxes.
Who Shouldn't Pay Quarterly Taxes?
Some businesses are exempt from quarterly taxes under certain strict situations. Overall, your business doesn't need to pay estimated taxes if it meets the following conditions:
- You are a self-employed individual and expect to owe less than $1,000 in annual taxes.
- You are a self-employed individual, and your withholding and refundable credits are more than 90% of your current years or 100% of your previous year's tax liability.
- You are a corporation and expect to owe less than $500 in annual taxes.
It is worth noting that many startups with limited incomes may qualify for exemption from quarterly taxes. However, it is advisable to ensure that your business fulfills these requirements before you decide to skip your quarterly tax payments.
How are Quarterly Taxes Different From Annual Taxes?
Quarterly taxes differ from annual taxes in terms of payment dates. Businesses should pay estimated taxes quarterly – payments are made four times a year or every three months.
In contrast, annual taxes are paid once per year when filing the business's annual tax returns. Quarterly tax payments are calculated when you go to file your annual return. Think of it as partially paying your annual amount due at milestones throughout the year and truing up with your annual return.
Understanding Federal Taxes You May Owe
Your business may also owe the federal government other taxes besides the quarterly taxes. However, this depends on its structure.
Notably, LLCs and sole proprietors must also pay the federal government self-employment taxes. However, you are exempt from a self-employment tax if your business is a C-corporation or an LLC taxed as a C or S-corporation that pays you as an employee.
Understanding State Taxes You May Owe
Your business may also owe other taxes to the state government where it is located or operates. Additional state taxes may include income, employment, use, and sales taxes. However, the taxes owed depend on several factors, most notably:
- The state's taxation laws and policies – most notably, whether the state charges income tax.
- The business's structure and income.
It is worth noting that businesses with offices and operations in multiple states may also owe taxes to multiple state governments. It is also worth noting that taxable business operations also include selling your products or services in the state, regardless of whether or not you have offices there.
What Happens if You Make Mistakes When Filing Your Company's Tax Returns?
Underpayments (paying less than what you owe) and late payments are the most common mistakes that businesses make with their quarterly taxes. Paperwork errors are also common when filing annual tax returns.
The IRS and state tax authorities may penalize you for these errors. The penalty is essentially an interest charge on the outstanding amount not paid. Overall, the amount owed in penalties will depend on the outstanding amount – they increase relative to the amount not paid for the previous artery tax period. The IRS determines the interest rates and adjusts them every year. Some exemptions include the following circumstances:
- You couldn't pay the correct amount on time because you are the victim of a natural disaster (such as the COVID-19 pandemic) or an incapacitating accident.
- You can prove a reasonable cause for underpaying – reasonable causes include being 62 years old, retired, or becoming disabled during the current or previous year.
You are also exempt from penalties if the previous quarterly tax payments cover the missed or underpaid amounts. However, paying more than what you owe in estimated taxes entails drawing capital from your business, limiting its cash flow. Fortunately, you can avoid overpayments, underpayments, and penalties for other mistakes by soliciting professional small business tax help services or using accounting software.
How can Accounting Software Help?
Accounting software is designed to handle your business's accounting duties, including calculating and filing quarterly taxes. The software works by tracking the business's income, expenses, and other financial transactions.
Accounting software can help make tax compliance easier in the following ways:
Accuracy
Tax calculations usually involve many variables that can overwhelm and confuse most accountants. However, accounting software uses advanced algorithms that track and record everything related to the business's taxes. They are also designed to handle some of the complicated paperwork, minimizing the risk of making errors and preventing costly penalties.
Cost Efficiency
Accounting software can assist in calculations, reducing the time needed to be spent on preparing taxes. Be sure to have a human check the work and verify accuracy to avoid interest and penalties for errors.
Saving Time
It is important to make your quarterly tax payments before the set deadline. This can be a struggle for businesses that wait until the last minute to calculate and file their taxes. Accounting software helps save time because it works faster than humans and always tracks and records all tax-related transactions, ensuring that everything is ready to go before the deadline.
Make Tax Time Easier
Yes, tax time can be easier if you hire the right accounting company to handle your business's taxes. hiline is here to help! We offer comprehensive accounting and taxation services for businesses in various industries across the U.S. Get in touch today to learn more about our accounting services and how we can help.
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