What's the deal with Quarterly Estimated Taxes?
Once you become a business owner you're going to hear a lot of chatter about Quarterly Estimated Taxes. The thoughts swirling thru your brain might range from:
"Holy shit, do I have to file taxes every quarter?"
"Umm, I haven't been doing that. Am I in trouble"
Let's start with the reason estimated tax payments exist. Taxes are pay-as-you-go. That means you must make payments as you earn money throughout the year (think back to when you were an employee and they withheld payroll tax). You don't have to file anything just need to make the payments if required.
Who needs to pay estimated taxes? If you know that you will owe more than $1,000 to the IRS, you will want to make quarterly tax payments. Each state varies on their requirement for when you need to start paying in quarterly, so just look up your state’s department of revenue website and see what they require.
What happens if I don’t pay quarterly taxes? If you don’t pay into quarterly taxes (and you are supposed to), you could end up owing the IRS an underpayment penalty in addition to the taxes that you owe. The penalty depends on how much you owe and the amount of time that you owed it to the IRS.
What are the due dates for 2021?
- Quarter 1 payment (January 1 to March 31) – April 15
- Quarter 2 payment (April 1 to May 31) – June 15
- Quarter 3 payment (June 1 to August 31) – September 15
- Quarter 4 payment (September 1 to December 31) – January 17
(Corporations due Dec 15)
Heads up: Be sure to check your state’s website for their due dates! They are not always the same as the federal due dates.
How to make quarterly tax payments?
Complete the Form 1040-ES (Estimated Tax for Individuals) and mail it to the IRS with a check. You also have an option to pay online via the IRS payment portal.
Most states have an online payment portal as well. For California, check out the FTB website.
How to calculate quarterly tax payments? Paying 100% of the taxes you owed in the previous year is sometimes referred to as the safe harbor rule. Even if your income grew this year, you will avoid penalties if you match the payments that you owed in the previous year (but you will still have to make up the additional tax payments).
Keep in mind, you aren’t actually filing any information at this time. You’re simply making a deposit towards your year-end balance. If you skip a payment, it’s not the end of the world. Try to catch up the next quarter or plan to pay the balance at tax time.
*If you've already filed your taxes this year, your tax preparer likely provided estimated tax payment vouchers.*
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