Starting a new business can be an exciting venture that offers you the freedom to be your own boss. In addition to this freedom, there are also many tax benefits that come with being a business owner. However, one aspect of running a business that you need to be aware of is the requirement to pay quarterly taxes.
Quarterly tax payments, also known as estimated tax payments, are necessary for individuals who have income that is not from an employer. This includes business owners, contractors, and freelancers. Shareholders in S- and C-corporations are also required to make quarterly tax payments, according to Score, a nonprofit resource partner of the U.S. Small Business Administration.
The amount of these estimated tax payments is based on your quarterly income. It’s important to note that the payments must include more than just taxes on your business income. They must also include the money you owe for self-employment taxes, such as Social Security and Medicare payments for yourself and any employees you have.
In addition to those earning self-employment income, there are other situations in which you may be required to pay estimated taxes. According to HRBlock, you may need to make quarterly tax payments if you make money from the sale of stock, interest, dividends, rent, or the sale of a house. Income from unemployment compensation, alimony, and the taxable part of your Social Security benefits must also be included.
However, there are some situations in which individuals do not need to make estimated tax payments. Bench, a bookkeeping service for small businesses, states that it is unnecessary if you have been a U.S. citizen all year, did not file a tax return in the previous year, or if your tax year was 12 months long. Sole proprietors and individuals not expecting to owe more than $1,000 in taxes do not need to file estimated taxes either. Instead, they can report all their taxes on their regular tax forms.
Calculating your estimated taxes can be a complex process. The IRS expects you to include all anticipated income, including taxable income, adjusted gross income, other taxes, credits, and deductions. It’s important to make these calculations as accurately as possible to avoid tax penalties. The IRS provides Form 1040-ES to help individuals estimate their quarterly tax payments.
When it comes to making quarterly tax payments, the IRS has set specific deadlines for each payment. The payment due dates for 2023 are as follows: April 18th, June 15th, September 15th, and January 16th, 2024. It’s worth noting that the fourth payment due date is not mandatory. If you pay any remaining taxes owed by January 31st, 2024, you can ignore the fourth payment.
Failing to pay quarterly taxes can result in penalties imposed by the IRS. These penalties may be charged for late payments, underpayment, or overpayment of taxes. The penalty charges for being late are 0.5 percent, with an additional charge per month for overdue taxes, up to a maximum of 25 percent of taxes owed.
However, there are circumstances in which the IRS will not charge a tax penalty, known as safe harbor rules. These include owing less than $1,000, paying at least 90 percent of the current year’s taxes, paying 100 percent of last year’s taxes (or 110 percent if income exceeds a certain threshold), being unable to make payments due to a disaster or unusual circumstance, or being retired or disabled with a reasonable cause.
Making quarterly tax payments has its advantages. One benefit is that it prevents you from having to come up with a large sum of money at the end of the year. Additionally, making these payments allows you to adjust them if your income varies throughout the year.
In conclusion, it is important for business owners, contractors, freelancers, and other individuals with non-employee income to understand the requirement of making quarterly tax payments. By accurately calculating and paying these estimated taxes, you can avoid penalties and have a smoother financial experience throughout the year.