As a small business owner, you may be required to file quarterly estimated taxes if your tax liability exceeds a certain threshold and you don’t have sufficient withholding from another source (such as a W-2 job) to offset that liability.
Let’s talk about how to know whether you owe quarterly taxes and how to estimate them.
Estimated taxes are generally paid in four equal installments throughout the year.
These are the upcoming quarterly tax due dates:
(Source: Internal Revenue Service)
The IRS has a two-part test to know whether you need to pay quarterly taxes:
In other words, you must pay estimated taxes if you expect to owe at least $1,000 and you don’t have sufficient withholding to cover your tax liability.
If you or your spouse don’t have other W-2 jobs that withhold taxes and you expect your small business to be profitable, you will most likely need to pay quarterly estimated taxes.
However, if you have a W-2 job that withholds taxes, it will depend on how much withholding you have. You can avoid having to pay quarterly taxes if you increase your employer’s withholding by giving them an updated W-4.
Here are two hypothetical examples to illustrate the effect of withholding on quarterly tax payments:
No quarterly taxes due in this situation:
Let’s apply the two-part test:
You will need to remit quarterly taxes in this situation:
Now for the two-part test:
The IRS publishes a full worksheet for calculating your quarterly taxes attached to form 1040-ES. To get your exact numbers, you’ll want to follow that worksheet or consult a tax professional like Daybreak Tax.
Your estimated tax is the total amount you expect to owe for the year: tax burden minus deductions, credits, and withholding. Then, divide this amount equally into four installments to calculate your quarterly estimated tax payments.
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