How to pay quarterly taxes for small business?
If there’s one common pain point that causes headaches for finance teams across the world it's taxes. Taxes are universally accrued by all governments and are mandatory for keeping your books in order as well as for staying on the right side of the law.
Paying taxes can be a complicated process. Taxes are commonly believed to be payable only annually, but quarterly business taxes also need to be accounted for and paid. Not sure what these are and how to go about paying quarterly business taxes? We’ve got you covered, read on for an in-depth analysis of how to pay quarterly taxes for business.
What are quarterly business taxes?
If you are self-employed, a freelancer, or have a low withholding rate on your paychecks chances are that you’ll have to pay quarterly or estimated taxes to the government throughout the year, in four installments. Quarterly business taxes are a specific tax that is payable by self-employed individuals and entities.
You might also have to pay quarterly taxes for small business if your organization is expecting to owe taxes worth $1000 or more. Moreover, any income or earnings generated by a company via capital gains, retirement account distributions, or dividends can also result in a business having to file estimated or quarterly taxes for business.
How to calculate business quarterly taxes?
There are a total of 4 steps you need to follow in order to calculate small business quarterly tax payments:
1. Find your tax bracket
Your first step should be to determine which tax bracket you fall under. Every government has its own tax rates for different income brackets that people fall under, check with legal sources and determine your tax bracket.
Doing this will help you determine the exact rate at which you need to pay your taxes, whether you need to pay it and how much you need to pay. Before you progress any further you should also check whether you qualify for other tax bracket criteria such as filing status, number of dependents, number of jobs, etc.
2. Calculate deductions and credits
Next, you need to determine the standardized or itemized deductions you qualify for and which ones you’ll be opting for. While standardized deductions are far simpler, sometimes itemized deductions can offer you more in terms of returns.
So, it would make sense to deep dive into the nuances of itemized deductions you qualify for. Once you’ve determined your deductions and credits strategy, total them and deduct the amount from your total taxable income.
3. Incorporate self-employment taxes
For each year your government will likely set a new, updated self-employment tax rate. For example, in the year 2020 self-employment tax in the US was 15.3% up to $137,700 and 2.9% on any net income above that threshold.
Self-employment tax laws also outline how much of tax you can have deducted. These rates may or may not change, make sure you verify the numbers before you start calculating. Next, calculate your taxable income as per these rates.
4. Calculate final taxable income, tax liability, and estimated quarterly tax payment
Finally, once you’ve completed the previous steps you should have your total income tax and amount to be paid in self-employment taxes. Add these two numbers up and you should have your total tax owed annually which you can then proceed to divide into four and pay quarterly to your country-specific tax authority.
How are annual taxes different from quarterly taxes?
Annual taxes differ from quarterly taxes for business in the sense that the former needs to be paid at the end of a year while the latter needs to be paid over the course of a year at the end of each quarter. Moreover, even if you pay estimated quarterly business taxes you’ll still have to file an annual income tax return.
If when you calculate your annual tax liability for the year you find that your quarterly estimated payments have fallen short, you’ll owe additional taxes. If not and you find that you overpaid in your quarterly payments you’ll be entitled to a refund.
What taxes do businesses pay quarterly?
Quarterly business tax payments usually entail two tax types:
● Self-employment tax: This is the tax you have to pay for your self-employed income. You’d normally be splitting this amount with your employer but instead, here you’ll have to pay both your end and that of you as your own employee.
● Income tax: Quarterly IT payments are paid on total income as per standard IT rates, similar to annual IT tax payments.
How to pay quarterly business taxes?
After you’re done calculating your business estimated tax payments you can then proceed to pay it in the following ways:
1. Pay online: You can choose to do your quarterly business tax filing online. If your government’s tax authority has a payment gateway-enabled website you can always pay quarterly business taxes online. In the US, for example, you can go to the official IRS website and set up payments via debit or credit card.
2. Pay via the app: If your tax governing body has a payment-enabled app available on the Playstore and/or AppStore you can download and pay via the app itself. In the American setting, this can be done via the IRS2Go app.
3. Pay via phone: Many governments also have other modes of payment besides an app that can be used to pay taxes via phone, e.g. the Electronic Federal Tax Payment Service or EFTPS made available by the IRS.
4. Pay via cash or check: Paying personally, manually at your local tax office, or just mailing a check is always an option.
Who pays quarterly business taxes?
Quarterly business taxes are typically meant to be paid by self-employed individuals, freelancers, or contract workers. Basically, any entity or individual likely to owe $1000 or more for the income they have generated will have to pay quarterly business taxes.
Another case where you might have to make quarterly business tax payments is if you have any income or earnings generated via capital gains, retirement account distributions, or dividends.
How to plan for quarterly business taxes?
Paying quarterly business taxes can be a daunting task. The numbers can be pretty big and you don’t want them to come as a surprise at the end of each quarter. Once you’ve estimated the amount of tax you’re likely to pay for a year the best next step would be to strategize how exactly you’re going to be paying it. Here are two general approaches businesses take:
Monthly: Transfer a particular amount each month to a separate savings account. This amount should be your total annual tax divided by 12.
Percentage: Transfer a particular percentage of each paycheck you get to a separate savings account. This percentage should be the percentage of income you will require when you pay quarterly taxes for business.
Which of these approaches is best for you will depend on your income structure, cashflow and expenses required.
How to make quarterly tax payments?
Timely, efficient tax payments can save you and your teams a lot of effort. Manage your employee expenses and thereafter your quarterly business tax filing in a manner that requires the least amount of resource utilization while at the same time giving you complete control over all that’s going on.
You can use quarterly tax software, financial advisors, and a range of other tools and services to help with tax filing. The digital revolution has brought the finance world many a gift, utilize them and capitalize on the power of automation to streamline business estimated tax payments.
FAQs
For the year 2022, the quarterly tax payment dates you need to follow are;
● 1st Quarterly tax payment date: April 18, 2022
● 2nd Quarterly tax payment date: June 15, 2022
● 3rd Quarterly tax payment date: September 15, 2022
● 4th Quarterly tax payment date: January 17, 2023
No, estimated tax payments are categorized as personal expenses and are therefore not a business expense. In the US, however, the IRS considers self-employment tax’s employer part as a business expense and therefore allows you to deduct it as well.