How to File Quarterly Taxes: A Small Business Guide to Quarterly Estimated Tax Payments.

Myranda Mondry, Senior Content Creator at Intuit

When you think about tax time, you probably think about the whirlwind of tax forms that occurs between January 1 and April 15. But, in actuality, tax time comes four times a year.

The United States tax system is “pay as you go,” meaning you pay income taxes as you recieve income rather than all at once at the end of the year. These tax payments are broken up into four installments that occur once every three months called quarterly estimated tax payments. And if you expect to owe more than $1,000 in taxes at the end of the year, you need to make these payments.

But don’t worry. More than likely, you’ve been making these quarterly payments all along and just didn’t realize it. If you work for an employer and submit a W-4 form, your employer calculates your quarterly tax payments for you and automatically withholds them from your paycheck. However, for small business owners, the responsibility of calculating and paying quarterly estimated payments falls on you. And it all starts with determining how much you’ll owe in taxes by the end of the year.

How to Determine How Much to Pay in Quarterly Estimated Tax Payments.

Quarterly estimated tax payments are just that: estimated. The IRS expects you to estimate how much you might owe in taxes and pay the majority of those taxes throughout the year. These numbers aren’t supposed to be exact, but they must be in the ballpark. Paying anything less than 90% of the total taxes due by the end of the year can result in a financial penalty as high as 6% from the IRS.

Paying quarterly estimated taxes correctly all hinges on your ability to accurately calculate how much you’ll owe at the end of the year.

If you’ve been in business for longer than a year, you can use your previous year’s income to estimate your tax payments. It’s a good idea to pay at least 100% of the prior-year’s taxes. This is called the 100% prior-year safe harbor. However, if you expect to make significantly more income this year, you’ll need to make up for any shortfall when you file your return. If you expect to make less this year, you may overpay.

If you own a seasonal business or your income otherwise fluctuates throughout the year, you can use the annualization method to increase your quarterly payments without penalty as long as your earlier payments were correct based on the income you made during that time.

But, if you’re new to business this year, you’ll need to rely on financial predictions to calculate your taxes. You should have at least a few months of business under your belt--calculate your average monthly income and multiply by 12. This will give you your total estimated income for the year.

How to Calculate Quarterly Tax Payments Step-by-Step.

The IRS has free resources to help you calculate your quarterly estimated tax payments. And if you use an accounting tool like QuickBooks Self-Employed, your tax payments are estimated automatically. But if you plan to take a DIY approach, or just want to understand how these payments are calculated, these are the steps you should take:

1. Start with your total expected income for the year. Apply any tax deductions to get your adjusted gross income.

2. Use Tax Rate Schedules provided by the IRS to determine your tax amount. Multiply your adjusted gross income by the applicable tax rate to find your estimated income tax owed.

3. Factor in any self-employment taxes (like Social Security and Medicare) to get your total estimated tax for the year.

4. Divide your total estimated tax by four to get your quarterly estimated tax payments.

How to Pay Quarterly Estimated Taxes.

You can easily pay your quarterly taxes online by linking your bank account to EFTPS.com, the electronic federal tax payment system. You can pay using a credit card, but you may have to pay an additional service fee if you choose to go that route. Additionally, individuals can use IRS Form 1040-ES to submit quarterly payments, while corporations can use Form 1120-W. Payments are due each quarter of the calendar year. The IRS can penalize those who don’t file quarterly taxes when they’re due--so be sure to pay on time. Quarterly payment due dates are:

● April 15 for income from January 1 to March 31 (Q1)

● June 15 for income from April 1 to May 31 (Q2)

● September 15 for income from June 1 to August 31 (Q3)

● January 15 (of the following year) for income from September 1 to December 31 (Q4)

It’s a good idea to create an “estimated taxes” bank account to hold funds for estimated tax payments. This way you’ll always have the money you need to pay quarterly estimated taxes in full and on time, avoiding expensive penalties.

How much money you should set aside depends on your personal circumstances and tax rate, but you should plan to set aside at least 30% of your revenue to account for income tax, Social Security tax, and Medicare tax.

Tax Time is All The Time.

When it comes to these quarterly tax payments, it can be tempting to “set it and forget it.” To calculate your taxes once at the beginning of the year, set up automated payments through the IRS, and call it a day. But it’s important to continually monitor income and expenses throughout the year to make adjustments to your estimated payments as needed.

For example, you may need to increase your payments as the year goes on (and revenue goes up) to avoid underpayment penalties. Or you might discover that you can reduce your quarterly tax payments to keep more of your cash on hand. Any significant changes in income, positive or negative, will impact your quarterly estimated tax payments. Big changes in personal circumstances, like a marriage, divorce, or birth of a child, can also impact your tax liability and estimated taxes.

Finally, tax laws are subject to change--and they change all the time. Small business owners need to keep a finger on the pulse when it comes to fluctuating tax laws and IRS regulations. It’s a lot to ask of small business owners who are already juggling a number of plates to keep their businesses running smoothly. So leave the tricky stuff, like taxes (which count for like six plates in the juggling act), to the professionals. An accountant or tax professional can ensure you’re maximizing tax deductions, calculating quarterly taxes correctly, and paying them on time.

A profit margin is the percentage of profit you keep from each sale, or how many cents of profit you keep from each dollar of sale. Understanding your profit margin can help determine whether or not your products are priced correctly and if your business is making money. Calculating your profit margin gives you a good indication of the overall health of your business. The equation looks like this:

Profit Margin = Net Income / Gross Revenue

(For info on how to calculate your net income, see no. 2.) Gross revenue or total revenue refers to the sum of all sales receipts.

A low profit margin may also indicate that your inventory is imbalanced or that your business is simply not handling expenses well. Whereas a high profit margin generally indicates a healthy company.

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