As a small business owner, you’re responsible for paying numerous taxes to the IRS, your state, and potentially your local government. While some can be paid annually, waiting until year-end to pay can leave you with a significant bill that’s hard to pay. To avoid penalties and protect your finances and small business growth, paying business quarterly taxes for your income and self-employment obligations is a great strategy!
In this overview, you’ll learn the benefits of paying quarterly and how to stay on top of your taxes. It’s important to know that this is only meant to be a resource to help with financial management – be sure to discuss all personal and business tax-related issues with your certified public accountant (CPA).
What are business quarterly taxes?
As you run your business and revenue flows in, you have the responsibility of paying taxes. Depending on the nature of your business, your business structure, and your location, you may be responsible for:
- Income tax on the salary or distributions that you take for yourself.
- Self-employment tax, which covers the portion of your Medicare and Social Security taxes that would otherwise be deducted from a paycheck if you were a W-2 employee.
- Payroll taxes for any employees (federal income-tax withholding, plus the employer and employee portions of Social Security and Medicare).
- State and local sales taxes on goods and services that you sold throughout the year.
Your accountant can help you determine which tax payments you need to make quarterly (meaning four times each year, instead of one annual lump-sum payment). If you haven’t been working with one, find a good CPA who can help.
It’s important to know that as your business evolves and grows, the types of taxes that you’re required to pay may change. For example, if you launched an interior-decorating firm as a sole proprietor with no employees, then you’re only responsible for your own income and self-employment taxes (and any required sales tax), but as your firm grows to include employees, your business will also become responsible for collecting and paying taxes taken out of their paychecks.
What are the benefits of paying your business taxes quarterly?
Although it may initially feel daunting to manage, quarterly estimated tax payments have many benefits for business owners:
- Makes payments more manageable: It’s often easier, for example, to pay $10,000 quarterly than $40,000 at the end of the tax year.
- Gives you a financial cushion: It also provides some financial protection for you if you experience any unforeseen circumstances that make it difficult for you to pay the full annual payment.
- Demonstrates financial responsibility and credibility: By making quarterly tax payments, lenders and business partners will see that you’re on top of your legal and financial obligations, you avoid paying penalties and interest, and you understand that non-payment or underpayment could put your personal or business finances at risk.
Paying in full at your annual deadline is an option, but it’s riskier for cash flow as well as personal and business financial planning. In addition, it can be very stressful to have this hanging over your head throughout the year.
How much business tax should you pay each quarter?
The IRS has made it easier to determine how much you should pay each quarter – using this estimated-tax guidance can help. The IRS also has a standard threshold for avoiding penalties: You must generally pay at least 90% of your total federal tax for the current year or 100% of the prior year’s total tax (110% for higher-income taxpayers).
This total federal tax liability already includes both income tax and self-employment tax, which is typically 15.3% of your net self-employment income and covers Social Security and Medicare contributions normally paid by employers. If applicable, don’t forget to set aside funds for your state and local tax payments as well.
How to pay your business taxes on time
Your accountant can help you set up quarterly tax payments or you can make payments yourself by creating an account on the IRS website and, if applicable, your state’s tax department.
What to do if you can’t pay your business taxes in full
If you’ve gotten behind on taxes, it’s possible that you won’t be able to pay the full amount when due. In this case, the most important thing is not to ignore your tax liability any longer. Instead, talk to your accountant.
The IRS and most state tax departments have installment agreements that are available if you can’t pay in full. However, it’s important to know that although they can help you and your business get back on track, interest continues to accrue even while you’re on a payment plan.
It may also be worth exploring other financing options, so talk to your accountant to find the best solution – one that gets you back on track for taxes owed, factors in future payments, and reduces the impact of penalties and interest on your cash flow and profitability.
Business quarterly taxes make financial management easier
While paying taxes annually is an option, paying taxes quarterly is the most effective way to manage income and self-employment taxes, avoid surprises, and maintain financial credibility. If you’re unable to pay your taxes in full by the annual due date, installment plans are available as a last resort, but talking to a CPA or other tax professional may help you find a better way to get caught up and move forward with confidence into the next fiscal year.
For more ways to strengthen your business’s financials and prepare for a strong new year, this business year-end checklist can help.
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