Well, you’re in luck because today I’m breaking down everything that you need to know about estimated taxes payments for small businesses. After digging deeper into this topic, you’ll know what estimated taxes are, how to figure out how much you need to pay and, of course, how to actually make your payments.
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What are estimated tax payments?
Your estimated taxes, which are also called estimates or quarterlies, are payments that you make throughout the year towards your final tax bill. Here’s the thing, we don’t know how much our tax bill is going to be until we actually file our taxes. All the payments that we make towards our tax bill are… estimates! Yeah, the IRS is real original like that.
The IRS doesn’t want to wait around to collect your tax payments. They want to get your money as you make it. This system of estimated taxes requires that self-employed folks and small business owners make quarterly payments towards their taxes, which is kinda like an installment situation. You make money, and every quarter you send an installment payment on what you’ve earned to the government.
Even though it’s a requirement, estimated tax payments are really good for your finances. It spreads your tax payments out across the year.
Taxes can get very expensive for self-employed folks. And getting hit with a $20,000 tax bill all at once is PAINFUL. So, paying your taxes in installments benefits you and your cash flow because it ensures that you’re not sucking your business dry at tax time.
How do estimated taxes work?
Throughout the year, you pay estimated taxes four times. THEN, at the end of the year, you file your taxes. Once you file your taxes, you’ll know how much you owe the government. This is where your estimated tax payments come in.
All the payments you made throughout the year are applied to your final tax bill. For example, if you owe $15,000 in taxes and made $12,000 in estimated tax payments…then you just have to pay the difference, which is $3,000.
On the flip side, if you overpay your estimated taxes then you get a refund. It’s like the holy grail of tax situations. Or you can skip the refund and apply the overage to your next estimated tax payments.
That’s right… estimated taxes never go away. Because they are based on tax year, every year you’re going to have to make a series of payments. So settle in, because you’ll be doing this for a while.
Who has to pay estimated taxes?
If you’re self-employed, which means you have non-employee income, then you’ll most likely need to pay estimated taxes. And before you start grumbling, “Ugh, why do self-employed people have to do this when regular employees don’t?!” – slow your roll.
Everyone is in some way making estimated tax payments. Employees have taxes withheld from their paycheck every time they’re paid. The difference is that as self-employed folks, we don’t get a paycheck…which means there’s nothing to withhold. Which means that WE need to take the initiative to pay our estimated taxes.
The next qualifiers is if you think you’ll owe more than $1,000 in taxes at the end of the year. Basically, if your business is relatively profitable, then you probably need to pay estimated taxes.
What happens if you blow off your estimated taxes?
You get hit with a penalty, and that’s a bummer.
How do I know how much to pay?
There are two ways to figure out your estimated tax payments. The first is by basing it on your previous year’s taxes. After you file your taxes, you should receive a form that tells you how much to pay every quarter. If your income is consistent year to year, this method will work for you. But if your income fluctuates or you have a growing business, you definitely want to calculate your tax payments yourself.
Let’s say you make $40,000 more this year than last year. But you’re making payments based on last year’s numbers. You’re going to have a HUGE difference between your estimated payments and your final tax bill.
Personally, I like calculating estimated taxes in real time. It’s more accurate and allows you to make payments based on what you’re really earning at the moment.
How does this second method work?
First you need to know your net income for the period of your estimated tax payments. Figuring that out is pretty easy. You can run a Profit & Loss report in your bookkeeping program or, if you don’t have a bookkeeping program, you can subtract your tax deductions from your total revenue… and that gives you your net income.
Revenue – Tax Deductions = Net Income
Next, divide your net income by 30%. 30%!! Yeah, here’s why it’s so high: First, a portion of your estimated tax payment covers your self-employment tax which is a whopping 15.3% of your net income. Your estimates also cover your income tax. Your income tax depends on your tax bracket, but 15% is a good middle of the road estimate for most people. If you know you’re in a higher tax bracket, you may need to increase the percentage to 35%. If you know you’re in a lower tax bracket, you could decrease the percentage to 25%.
Here’s how this looks in practice. You have $25,000 in net income for the first quarter of the year. You multiply that by 30% and your estimated tax payment is $7,500.
$25,000 x 0.30 = $7,500
How do I make sure I have money for my payments?
After that example, you’re probably like, “WTF, how am I supposed to have $7,500 laying around every quarter?” The answer is by saving for your taxes every month. While you only make estimated tax payments every quarter, you should be saving monthly for your taxes.
The process of saving monthly for your taxes is similar to the second method for figuring out your quarterly tax payments. You’ll need to know your net income for the month and also your tax savings percentage, which will be around 30%.
Then you take your net income and multiply that by 30%. That’s how much you should save for your taxes. I recommend you put your tax savings into a separate tax savings account so you aren’t tempted to dip into it.
Then, when it’s time to make your payments, you transfer the money from your savings into your checking. There you go! You’ve got the money for your payments. Trust me, it’s way less painful this way.
How do I make a payment?
Here’s the most depressing part of this whole process. It’s the part where you part with your money. But before we talk about how you make your payments, let’s talk about when your payments are due. The estimated tax payment due dates are:
- April 15th
- June 15th
- September 15th
- January 15th.
Here’s how to make your payments. First, you can go all old school and pay with a check. When you pay via check you do need to include a 1040-ES form which gives the government your information so they can apply the payment to your taxes.
The second way (and my preferred method) is to pay online. There are two websites you can use and they both do the same thing. Plus, both of them are free for you to use.
The first is the IRS Direct Pay website where you can pay via your bank account. Go to Make a Payment, enter in your taxpayer information, and bank info and you’re done. You’ve just paid your estimated taxes online.
The second site is the EFTPS, where you can pay via a credit card, but there is a fee. This site works pretty much the same way. You’ll enroll in the site and then you can enter your details and pay online.
However you pay, it’s important that you actually PAY! My number one tip for you is to save for taxes monthly. That’s the thing that will make this entire process more manageable.
I have something super special for you. I’m sharing my Biz Finance Survival Kit. It’s free and not only comes with a tax write-offs cheat sheet, but it also comes with four other cheat sheets and checklists for your small business. You can download the free survival kit below. You can also check out the following resources and blog posts to help you get clear on some of the concepts we talked about today:
- Everything You Need to Know About Self-Employment Income
- How to Automate your Tax Savings with Qapital
- 5 Super Easy Tax Prep Tips that Will Save You Time