One of the most basic yet most avoided topics when starting up a small business is tax requirements. Just face it, no one enjoys talking about taxes because they are complicated. However, as a business owner who wants to improve their entrepreneurial edge, you should bite the bullet and take the time to learn about a small business owner’s tax obligation.
If you’ve never experienced being self-employed before, the concept of quarterly taxes may seem pretty new to you. However, don’t be disheartened! You do not have to be an expert to know the ins and outs of quarterly tax payments—you only need to know the basics and work your way up from there.
This article will show you all the “whats,” “hows,” “cans,” and everything else you need to know about quarterly taxes as a beginner, plus how you can turn this dreaded process into a hassle-free one.
What is a quarterly tax?
A quarterly tax is an estimated payment that a business owner must pay, which is made each quarter to advance the annual tax return. So, with every coin you put into paying your quarterly taxes, you pay a chunk of your expected income tax for the year. However, note that the payments are merely estimated because they occur before you file your tax return.
The concept of quarterly taxation deadlines has provided individuals and businesses with a structure to make regular installments towards their final taxable income.
Who has to pay quarterly taxes?
The government mandates a large majority of the population to pay quarterly taxes. In particular, any person who expects to pay and file federal taxes must pay a quarterly tax. In particular, people who fit in these categories do not immediately have their taxes automatically withheld from their income:
- S-corporation owners
Who is not technically required to pay quarterly taxes?
Firstly, if you expect to owe less than 1000 dollars on your return, then you are likely not to be required to pay the estimated payments. Corporations are also not required to pay if they are expected to owe less than 500 dollars at the end of the year.
In a way, people avoid worrying about the hassle of estimating taxes because if you work under an employer, they are likely to do that for you by withholding a part of your wage to pay quarterly taxes.
What is the process of estimating a quarterly tax?
The best way to get a close number is to calculate your total expected business income. For small businesses, it essential to take extra caution in making this estimate because you don’t have a stable enough income trend upon which to base your numbers. In this case, you base your total expected income primarily on your earnings in the previous year.
The following steps will serve as a simple guide on what you need to do:
- Your total expected income will be the first thing you need to calculate. (Note: This is a handy step in applying for mortgage loans and other loan types because your gross income will be their basis for lending.)
- Apply any tax deductions so you can acquire your adjusted gross income (AGI).
- Take your AGI and multiply it by the relevant tax rate to get an estimate of the income tax you owe.
- Use Step 1’s total expected income to estimate the taxes for self-employment you will owe for Medicare and Social Security.
- Add together your estimation for your self-employment taxes and your estimation of your income tax owed. That’s this year’s estimated tax.
- Divide your tax estimation by four (considering a year has four quarters); that’s your tax amount for every quarter!
What are the quarterly tax due dates for 2021?
The count for the quarter starts based on the fiscal year. According to the Internal Revenue Service, the federal income tax deadlines are as follows:
- First-quarter deadline: April 15, 2021
- Second-quarter deadline: June 15, 2021
- Third-quarter deadline: September 15, 2021
- Fourth-quarter deadline: January 15, 2022
Can an extension be filed? What happens if quarterly tax payments are missed or skipped?
Extensions are limited. Apart from being granted only in exceptional cases, it is only granted through paper. In a way, this is because extensions are only given when you need more time to file your tax return.
However, if you’ve realized that you’ve missed a tax payment, make plans to pay it, or else you will suffer a financial payment for underpayment of tax.
Lastly, if you choose to skip your quarterly tax payment deliberately, make sure that the estimated taxes you have paid are already enough with the payments you made before the one you decided to skip.
Quarterly tax payments aren’t much of a hassle if small business owners organize themselves by calculating your expected tax due and keeping the payment deadlines on sticky notes. Once you have got all that settled, it really shouldn’t be much of a problem.