Guide to Calculating and Filing Federal Quarterly Taxes for Small Businesses and Self-Employed

As a small business owner or self-employed individual, you are responsible for paying quarterly taxes 4 times per year. Many people are unaware of this requirement and are surprised when they get a bill from the IRS for income taxes.

For most business owners or self-employed individuals, taxes are not automatically withheld from wages like they are with W-2 employment. You can reduce the risk of an unexpected bill during tax season or potential fees or penalties with the IRS by understanding your obligations with quarterly tax payments, including what they are, how they are calculated, and when to pay them.

What Are Quarterly Taxes?

Quarterly taxes, also known as estimated taxes, are tax payments made by individuals and businesses to the IRS for federal withholding every quarter. These payments are required for self-employed individuals and small businesses that expect to owe $1,000 or more in taxes for the current year.

Quarterly taxes include federal income tax, self-employment tax, and other applicable taxes, such as Social Security and Medicare tax. The IRS provides a worksheet, Form 1040-ES, to help individuals and small businesses calculate estimated quarterly tax payments. By making these estimated tax payments, you can stay on top of your tax obligations and avoid surprises when tax season arrives.

Quarterly taxes may also be referred to as estimated federal income taxes, quarterly estimated taxes, self-employment taxes, or quarterlies.

Benefits of Paying Quarterly Taxes

Paying quarterly taxes has several benefits that make managing your finances easier and more efficient. One of the primary advantages is avoiding penalties and interest that may be charged if you don't pay enough taxes throughout the year. By making estimated quarterly tax payments, you can ensure that you meet your tax obligations and reduce your tax liability at the end of the year.

Another significant benefit is improved cash flow. By making regular quarterly payments, you can avoid the financial strain of a large tax bill at the end of the year. This approach helps you manage your finances more effectively and reduces the stress and anxiety associated with owing a large amount of taxes.

Paying quarterly taxes can help you stay organized and maintain better control over your financial situation.

Who Does and Doesn't Need To Pay Quarterly Taxes?

How do I know if I have to pay quarterly taxes?

Self-employed individuals and businesses that expect to owe $1,000 or more in taxes for the current year must make estimated tax payments. This includes freelancers, independent contractors, sole proprietors, small business owners, farmers, and fishers.

If you fall into any of these categories, keeping up with your estimated tax payments is essential to avoid penalties and interest.

On the other hand, if you are an employee and your employer withholds taxes from your paycheck, you don't need to pay estimated quarterly taxes.

Additionally, you are exempt from paying estimated taxes if you meet all three of the following conditions:

• You have no tax liability for the current year,
• You had no tax liability for the previous tax year, and
• You paid either 90% of your current year's tax liability or 100% of last year's tax liability

If you are unsure about your specific situation, consulting with a tax professional is always a good idea.

How To Calculate Quarterly Taxes

Calculating quarterly taxes involves estimating your taxable income for the year and determining your quarterly tax payments using the IRS's Estimated Tax Worksheet, Form 1040-ES. 

Here's a step-by-step guide to help you through the process:

1. Estimate your income for the year
2. Subtract any above-the-line deductions you expect to incur
3. Subtract the standard deduction for your filing status
4. Subtract 50% of your self-employment tax
5. Multiply your adjusted gross income by your income tax rate
6. Use the 2023 tax brackets to determine your income tax rate
7. Multiply your estimated total income by 92.35%
8. Multiply the result by 15.3% (the self-employment tax rate)
9. Add your income tax and self-employment tax together
10. Divide the result by 4 to get your estimated quarterly tax payment

Following these steps, you can accurately calculate your quarterly tax payments based on your estimated income and meet your annual tax obligations.

When Are Quarterly Taxes Due in 2024?

Below is a table outlining when income is earned during each period and the corresponding due date for paying estimated quarterly taxes for the 2024 tax year:

Note: Always verify tax deadlines each year as they vary slightly due to weekends or holidays.

Your quarterly estimated payments are due based on the schedule above if you earn income without tax withholding. After your final payment in January 2025, you will file your 2024 annual tax return by April 2025.

What Happens if You Miss a Quarterly Estimated Tax Payment? Is There a Penalty?

You may be penalized if you do not pay enough tax throughout the year or miss a quarterly tax payment. The general rule is that 90% of your tax liability must be paid through withholding or by making timely quarterly estimated tax payments during each fiscal or calendar year; otherwise, penalties may apply, even though a refund is expected when your return is filed.

Any penalties owed are calculated based on the amount of tax you owe and the length of time that it's unpaid. 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 your payment is not received, the penalty increases to a maximum penalty of 25%.

There are a few circumstances under which you can avoid the penalty, such as showing that the failure to pay was due to circumstances beyond your control. But in general, it's best to ensure that your estimated tax payments are made on time to reduce the risk of penalties.

If you realize you have missed a quarterly estimated payment, the best course of action is to make the quarterly payment and submit the associated tax forms to the IRS as soon as possible.

Filing an Extension for Your Quarterly Estimated Taxes

If you cannot meet your quarterly tax payment deadlines, you can file for an extension to avoid penalties. While filing an extension gives you extra time to submit your tax return, it does not provide additional time to pay any taxes due.

You must still estimate your liability and make a payment by the regular deadline to avoid interest and penalties on any unpaid amounts. Business owners can request an extension by filing IRS Form 4868 for individual returns or Form 7004 for business returns.

Extensions can be helpful if you're still gathering information or experiencing cash flow issues, but they should not be relied upon as a long-term strategy. It's always best to make accurate, timely payments throughout the year to avoid additional charges.

How To File Quarterly Taxes

The process for paying and filing quarterly estimated taxes is similar to filing an end-of-year tax return. To meet your quarterly requirements, you must calculate any tax owed using the appropriate IRS forms, then submit the completed forms and any payment due using one of the payment options available through the IRS.

Here's a more detailed step-by-step guide:

1. Determine your tax liability for the quarter. This will be based on your income and deductions for the quarter.
2. Fill out the correct IRS form used for calculating estimated tax liability.
3. You can use one of the official IRS payment options to make a payment for the full amount of your estimated quarterly taxes due.
4. Keep records of your payments. For example, keep a copy of your IRS form, any documentation used to calculate your estimated tax liability, and your payment confirmation for your records.

Following these steps can help ensure compliance with the IRS's quarterly estimated tax requirements.

Required Forms

To correctly calculate your estimated taxes and submit them to the IRS, you will need to use the designated federal tax form for your situation:

• Individual filers (including sole proprietors or partners) should use IRS Form 1040-ES.

Use the detailed instructions provided with each form to accurately calculate your estimated tax liability for the quarter. If you feel uncomfortable completing the forms, contacting an experienced quarterly tax preparer is best to help reduce unnecessary penalties associated with underpayment.

Common Mistakes When Filing Quarterly Estimated Taxes

Several common mistakes can lead to penalties and financial setbacks when paying self-employment taxes.

One frequent error is underpayment, where taxpayers don't accurately estimate their tax liability. This can occur if business income fluctuates throughout the year, leading to miscalculations of what's owed.

Another pitfall is missing deadlines, which results in late fees and interest charges. Since the IRS sets strict due dates, failing to pay on time can add unnecessary costs.

Incorrect calculations are also significant for those filing taxes for self-employed individuals and small businesses. Errors in estimating income or overlooking deductions can result in paying too little or too much.

It is important to stay organized, track income closely, and use IRS Form 1040-ES to ensure accurate payments to avoid these common issues.

Tips to Avoid Common Mistakes

• Set calendar reminders for each quarterly tax payment deadline
• Regularly review income and expenses to adjust your estimated taxes as needed
• Keep thorough records of all deductible expenses to avoid underestimating your tax liability
• Use tax software or consult a tax professional to ensure correct calculations

Tools and Resources for Calculating and Filing Quarterly Taxes

Various tools make it easier to calculate quarterly tax payments and minimize errors.

Online tax calculators benefit small businesses and self-employed individuals, allowing users to quickly estimate their tax liability by entering income, deductions, and expenses.

Additionally, tax preparation software offers specialized features for calculating self-employment taxes, ensuring accurate payments, and adhering to IRS deadlines.

Tax service providers also offer solutions that automate the calculation and filing processes for small business owners. These resources ensure accuracy and help prevent penalties from underpayment or missed deadlines, giving business owners more time to focus on their operations.

How To Pay Estimated Quarterly Taxes

No matter how you prefer to handle your federal tax payments and liabilities, the IRS offers multiple convenient payment options to submit your quarterly estimated taxes on time. Here are the available methods, with added details and links to each service:

• Online through the Electronic Federal Tax Payment System (EFTPS): EFTPS is a free service allowing quick, secure payments directly to the IRS. One advantage is the ability to easily access your payment history, ensuring you can track and manage past payments for future reference.
• By mail to the address listed on Form 1040-ES: Mailing your payment allows for a tangible, physical record of your submission. This traditional method can be helpful for those who prefer paper documentation or need a mailing receipt as proof of payment.
• By phone: You can also pay your taxes over the phone, although you must submit your completed tax form via mail or online. This method can be convenient for those who prefer speaking to a representative, but it's important to note that it may take longer to process than other options.
• Using your mobile device with the IRS2Go app: The IRS2Go app allows you to make payments directly from your phone, offering the convenience of a mobile-friendly interface. It's an excellent option for those who are always on the go and need quick access to payment options.
• Same-day wire transfer: A same-day wire transfer is an option for those needing faster payment processing. However, additional fees may apply, and it's typically used for last-minute payments. This method ensures immediate receipt by the IRS.

Each option offers flexibility and ensures you can pay quarterly taxes in a way that best fits your needs.

Be Proactive about Your Quarterly Tax Obligations

Paying quarterly taxes may seem daunting, but staying current on your income tax obligations is essential to reduce unnecessary fees and penalties. Whether you are self-employed, a sole proprietor, or an independent contractor, correctly filing your quarterly estimated taxes is required if you earn income where your income tax is not already withheld on your behalf. Understanding self-employment taxes and how to pay them can ensure you stay compliant with the IRS.