One of the biggest surprises new entrepreneurs face is the quarterly estimated tax requirement. Unlike employees who have taxes withheld from each paycheck, business owners must proactively pay taxes throughout the year.
What Are Estimated Taxes?
Estimated taxes are payments made four times per year to cover your expected annual tax liability. These payments cover both income tax and self-employment tax (Social Security and Medicare taxes for business owners).
When Are They Due?
- Q1: April 15th (for January-March income)
- Q2: June 15th (for April-May income)
- Q3: September 15th (for June-August income)
- Q4: January 15th (for September-December income)
The Cost of Missing Payments
The IRS charges penalties for underpayment, currently around 8% annually. If you owe $5,000 in taxes and miss a quarterly payment, you could face a $400 penalty just for that quarter.
How Much Should You Pay?
A safe harbor rule: pay 100% of last year's tax liability (110% if your prior year AGI exceeded $150,000) divided by four quarters. This protects you from penalties even if your income increases.
Making It Easier
Set up automatic transfers to a separate tax savings account. A good rule of thumb is to save 25-30% of your business income for taxes, depending on your tax bracket and state requirements.
Disclaimer: Tax requirements vary based on your specific situation and can change. Consult with your accountant to determine the right estimated tax strategy for your business.
Don't let estimated taxes catch you off guard. Contact us to set up a quarterly tax planning system that keeps you compliant and penalty-free.
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