January is not fun for business owners. After celebrating Christmas and the New Year holidays, you must focus on figuring out the estimated tax deadlines for the year. All business owners must calculate the estimated taxes of their businesses, so they can prepare ahead of time to pay them promptly.
The Internal Revenue Service does not like waiting to receive tax payments from business owners. Instead, they want the tax payments on the income earned as soon as the business gets it. Failure to pay quickly could result in additional penalties and fees added to the tax amount owed.
If you are a W-2 employee working for someone else’s company, you don’t need to calculate your state and federal tax payments because your employer automatically deducts them from your paychecks. This gives you the freedom to spend your income money without worrying about paying taxes later.
The Tax Burden for Small Businesses
Unfortunately, small business owners don’t have the same luxury as W-2 employees because they are responsible for calculating the taxes of their businesses and employees. In fact, all business owners think about their estimated taxes more than anyone else because they have the most significant tax burden in the eyes of the IRS. That is why small business owners are expected to pay taxes to the government every quarter.
The IRS allows business owners to submit four separate tax payments each year based on the business income earned per quarter. These quarters would like something like this:
- First Quarter: January 1st to March 31st – Taxes due on April 15th
- Second Quarter: April 1st to May 31st – Taxes due on June 15th
- Third Quarter: June 1st to August 31st – Taxes due on September 15th
- Fourth Quarter: September 1st to December 31st – Taxes due on January 15th
As you can see, the quarters are not four three-month periods. They are spread out over periods of three months, two months, three months, and four months. The fourth quarter payment is made on January 15th of the following year. If you are owed a tax refund after the fourth quarter, you can apply the refund money to the taxes owed for the first quarter of the new year.
What are Estimated Taxes?
The term “estimated taxes” refers to the estimated income taxes and self-employment taxes you will have to pay based on your company’s projected profits.
For example, if you own a sole proprietorship or single-member LLC, you must pay self-employment taxes in addition to the income taxes on your company’s profits. The good news is that self-employment taxes pay into your Social Security and Medicare programs, so you will benefit from them when you reach retirement age.
Employees only have to pay 50% of their Social Security and Medicare taxes on earned income because their employer pays the other 50%. But as a small business owner of a sole proprietorship or single-member LLC, the IRS considers you the employer and employee. As a result, you must pay 100% of your Social Security and Medicare taxes.
S-Corporations and C-Corporations have different tax rules. The upside is that you don’t have to pay self-employment taxes because you pay yourself as an employee of the company. However, on the downside, you have double the income tax liability because you must pay your personal income tax as an employee and the commercial income tax of your company. The company is not a disregarded entity like it would be for a sole proprietorship or single-member LLC.
It is Wise to Pay Your Estimated Taxes Early
You would be wise to pay your estimated taxes early and on time to avoid penalty fee charges from the IRS. There are two ways you can do this:
- Pay the same amount of taxes you paid the previous year in full
- Predict your company’s estimated profit and taxes for the new year and then pay taxes on those estimated profits upfront. Try to pay at least 90% of the estimated taxes you expect to owe.
These should be simple enough guidelines to follow. The last thing you’ll want to receive is IRS penalties for late payments because they can be substantial amounts. That is why you should pay close attention to when you pay your estimated taxes.
If you have extra cash reserves for your business, you should use them to pay your company’s estimated taxes in full. But if your company’s taxable income has increased since the previous year, then pay the previous amount of taxes you paid as your current estimated taxes. Then if you still owe anything else by the time you file your tax return, you can pay the difference at that time.
Has your company’s profits decreased since last year? If so, your estimated taxes won’t be the same as the amount you paid last year because you could end up overpaying if they were. Many businesses had this experience during the pandemic because the COVID-19 restrictions slashed the profits of most businesses in the country.
Anytime your company loses profits, it is better to predict the actual tax amount rather than look at the previous year as a model for what you should pay now. However, the safest solution would be to consult an accountant or tax professional for further information and advice on calculating your estimated taxes as accurately as possible.