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Quarterly Estimated Taxes The Tax Resource Guide

This is a Guide To Quarterly Estimated Taxes

If you are in business for yourself, then quarterly estimated taxes are just part of the job. But getting started can be overwhelming with all the forms and calculations that need to be done. The good news is there’s an easy way to start making your first round of payments without any stress! Always consult a tax expert for any official advice regarding your corporate tax rate or and special tax credits that your small business may be eligible for. Keeping a tax record is mandatory for any business owner to stay in compliance with the internal revenue service.

Dealing with quarterly estimated tax payments is just part of being in business for yourself. But setting them up for the first time can be overwhelming. This Tax Guide shows you the easy way to start making quarterly estimated small business tax payments. Small business taxes are separate from your personal income taxes unless you are filed as a sole proprietor. A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

What are quarterly estimated payments?

If you’re self-employed, the IRS generally requires you to pay your taxes in quarterly installments over the course of the year, rather than as a lump sum at the end. Quarterly estimated payments, sometimes also called quarterly income tax obligations, are a type of payment made by self-employed individuals to the IRS. All small business owners must pay federal taxes unless they have a special tax situation such as a 501c3 Tax-exempt filing.

They happen four times over the course of an individual’s annual taxation cycle. Some people may not like having their finances tied up in such irregular intervals because they feel it restricts what they can do with that money while waiting for each installment date; others might view this as insurance against being audited or accidentally paying too much on taxes at once (as happens from time to time).

What Is Sales Tax? A lot goes into deciding how much should go towards something called “Sales Taxes” which can vary from State-to-State, County-by-County, and even Town by town (or City). What Are The Different Types Of Sales Taxes There In America? That depends greatly upon location state income taxes, payroll taxes, and local government. It is important to note that quarterly estimated taxes are different from sales taxes. Some common misconceptions about sales tax are that people often confuse state and local retail sales taxes with other types of consumption-based taxation, like income or property.

This article clarifies what a sale’s tax actually is and how it impacts small businesses since it’s impossible to know exactly how much taxable income you’ll make during the year, you pay an estimated amount. If you didn’t already take my advice and sign up for Bench, let’s dive deeper into what quarterly estimated taxes are. To answer any additional tax questions you may have, always remember to consult with tax professionals when ever filing your taxes.

Who needs to pay quarterly estimated taxes?

Self-employed individuals and corporate entities alike are responsible for paying quarterly estimated taxes if they will owe $1,000 or more by the end of the year. If you have a self-employment situation where your income is less than what it would be as an employee, then you may qualify to pay annual tax payments instead. When it comes to federal income taxes and staying on an even playing field Bench provides the best tax and accounting tools for small business owners.

Who is exempt from quarterly payments?

Is your next quarterly payment due soon? If so, you should know that there are some exceptions to the rule. Certain individuals may be exempt from these payments depending on their income and the number of dependents they have in their household.

You don’t need to make quarterly payments if:

  1. You earn your income as an employee—meaning, you aren’t self-employed
  2. You meet three specific conditions:
  • You did not owe any taxes in the previous tax year, and did not have to file a tax return
  • You were a US citizen or resident for the entire year
  • Your tax year was 12 months long

In the second case, the IRS is giving you a break. If you didn’t owe or file taxes the previous year, then you don’t have a previous year’s numbers to base your tax estimate on. We’ll cover estimates, and how to make them, shortly.

Quarterly estimated taxes and bookkeeping

If your business needs to make quarterly estimated payments, good bookkeeping is essential to staying on track.

When you have a complete set of financial statements from the previous tax year, you’re better able to estimate this year’s liability. On top of that, bookkeeping info lets you plan your cash flow in the current year, so you don’t come up short when one of your quarterly payments is due.

Consider hiring a virtual bookkeeper like Bench to take care of your bookkeeping for you. Bench gives you a dedicated team to do your bookkeeping for you, so you always have the info you need to pay your taxes accurately and on time.

How to plan quarterly payments with DIY bookkeeping

If you do your own bookkeeping, it’s important to correctly categorize quarterly payments. Many business owners record them as expenses, such as “Tax Expense.” 

However, the taxes you need to pay are personal expenses, not business expenses. Recording it as an expense on your books mixes it in with your business expenses, and makes your income statements inaccurate. It is a good practice to stay within tax policy, especially when it comes to individual income taxes.

For the sake of keeping organized—and making sure your personal income tax statements correctly state your net profit before taxes—you should record quarterly payments as a draw.

In that case, you create an equity account called “Owner’s Taxes,” and draw quarterly payments into it from Capital. You then pull cash from Owner’s Taxes to pay the official IRS website.

Calculating your estimated taxes

There are two ways to calculate your estimated taxes for the year: With an income projection, and using the safe harbor rule. The first method takes into account all sources of possible earnings in order to estimate what should be paid at tax time; while the second assumes that a person’s average yearly salary will cover any potential future liability without having to do anything else extra-ordinary now or later so long as they never change their activity levels substantially for more than three years running…so choose wisely!

Calculating estimated taxes with an income projection

If you’ve already projected your income for the year—that is, estimated how much you’ll earn and spend, based on past business performance—then you can make an estimate based on those numbers. Add up you total tax liability, based on your projection—including self-employment tax, income tax, and all other taxes. Then, divide that number by four. The result is your quarterly estimated payment.

You can use worksheets on Form 1040-ES for individuals or Form 1120-W for corporations to help you make these calculations.

Calculating estimated taxes with the safe harbor rule

If you haven’t created an income projection for the year, the safe harbor rule lets you base your estimate on last year’s taxes. The best part? Even if your numbers are off, and you under- or overpay, the IRS won’t penalize you. That’s because the safe harbor rule lets you pay the same amount of tax you did the previous year. If your income for this year is greater or lesser than that amount, you won’t be penalized—you’ll just have to pay to make up the difference, or else receive a tax refund.

One exception. If your business income is $150,000 or more, you’ll need to pay 110% of the previous year’s taxes in order to qualify for safe harbor.

To use the safe harbor rule to your advantage, take your total tax bill for last year, and divide it by four. That’s how much you’ll pay the IRS each quarter. It’s a quick and easy way to get your taxes set up for the year ahead, without creating complex financial projections.

Quarterly estimated tax deadlines for 2021

The year is split into four quarters of three months each. The payment for each quarter is due two weeks after the quarter ends.

Here are the quarterly estimated tax deadlines for 2021:

  • For the period Jan 1 to March 31: April 15
  • For the period April 1 to May 31: June 15
  • For the period June 1 to August 31: September 15
  • For the period September 1 to December 31: January 18, 2022

The Quarterly Estimate Tax Calculator

If you’re ready to dive headfirst into quarter tax year estimated taxes, try Bench’s quarterly tax calculator. In eight steps, you’ll plan your quarterly payments for 2021.

Don’t feel like setting up quarterly payments yourself? Let a team of professionals at Bench do it for you—and get your taxes filed accurately and on time, with Bench.

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