A Guide to Quarterly Estimated Taxes
This article is for information purposes for small business owners only and should not be considered tax advice. Consult with your tax professional regarding your specific situation.
What Are Quarterly Estimated Taxes?
Quarterly estimated taxes are periodic tax payments made to the IRS and state tax agencies throughout the year. These payments help cover income tax and self-employment taxes that are typically withheld from a paycheck for W-2 employees.
Who Has to Pay Quarterly Estimated Taxes?
Generally, business owners, sole proprietors, freelancers, and self-employed individuals who expect to owe at least $1,000 in taxes when filing their return should make quarterly estimated tax payments.
You may also need to make estimated payments if you receive additional income outside of your regular W-2 wages, including:
- Dividends
- Rental income
- Investment income
- Side business income
- Alimony (for qualifying agreements)
- Contract or freelance work
For additional guidance, refer to the business structure information below.
How Are Estimated Taxes Calculated?
Most tax professionals use tax software that automatically generates estimated tax vouchers when preparing your annual tax return. These vouchers are typically included at the end of your completed return and are based on your prior year’s income.
Keep in mind these amounts are only estimates. If your income increases or decreases during the year, your quarterly payments may need to be adjusted.
A common rule of thumb is to set aside approximately 25%–30% of your net income for taxes.
Your bookkeeper can help by providing a quarterly Profit & Loss statement so you can better understand your net income and prepare for estimated tax payments.
When are they due?
Estimated tax payments are generally due on the following dates:
- April 15 — for income earned January through March
- June 15 — for income earned April through May
- September 15 — for income earned June through August
- January 15 — for income earned September through December
If a due date falls on a weekend or holiday, the deadline may shift to the next business day.
Estimated Taxes by Business Structure
Single-Member LLCs, Freelancers & Sole Proprietors
Estimated taxes are generally based on the prior year’s Schedule C income and are reported on the owner’s individual tax return.
Multi-Member LLCs & Partnerships
Individual members typically pay estimated taxes based on their share of the business profits passed through to them.
S Corporations
Owners who receive a reasonable salary through payroll generally have taxes withheld through payroll processing. However, additional profits or distributions may still require quarterly estimated tax payments.
Why Should You Pay Quarterly Taxes?
Avoid Penalties & Interest
The IRS and state agencies may assess penalties and interest if you:
- Fail to pay enough tax throughout the year
- Miss quarterly payment deadlines
- Owe a large balance when filing your tax return
Staying current on estimated payments can help minimize unexpected tax bills and penalties.
Improve Cash Flow
Paying taxes quarterly helps spread your tax burden throughout the year instead of facing one large payment at tax time. This can make budgeting and cash flow management much easier for business owners.
Stay Compliant & Informed
Nothing is more stressful than receiving an unexpected IRS notice. Staying on top of estimated taxes helps keep your business compliant while also giving you a better understanding of your business’s financial health throughout the year.
Helpful Links:
Massachusetts DOR Estimated Tax Payments
IRS Estimated Tax Information Page
This content is provided for informational purposes only. Please do not reproduce or republish this article without permission from YourQBGuru, Inc.