Setting up a small business on your own can be particularly risky but, at the same time, an incredible adventure. Your journey could take twists and turns you could never have accounted for. It doesn't matter if you have done it before or not – but it's a monumental effort. It takes a lot of zeal, dedication, and vigilance to survive and succeed.
Astonishingly, over 99.9% of businesses in the US are small businesses, with a growth rate of around 7.09%!
However, it is not just planning and executing strategies that will make your entrepreneurial goals attainable. To attain success, you need to be aware of your finances. That includes complying with the necessary tax requirements as the owner of a small business.
Starting a small business might be easy, but dealing with the tax obligations can be a daunting task. This is especially so when you have never been self-employed as that can make the process seem a lot more intimidating and complicated.
So, let’s understand what quarterly taxes are and how you can calculate them as a small business owner.
Quarterly taxes are estimated tax payments made every quarter (every three months). Thus, each quarter you pay a portion of your expected income tax for that particular financial year.
The payments are estimated as they occur before you fill out your income tax return. With the substantial move, the United States' tax systems require you to pay estimated tax throughout the year while not carrying the burden of paying them all together at the end of the year.
If you have paid federal income taxes, then you also need to pay your quarterly taxes. And this means everybody who owes at least $1000 in taxes needs to file it. Those who owe less than this amount are exempt and must pay taxes on income when they file their annual tax returns.
The various businesses that must pay quarterly taxes include -
These are unincorporated businesses with just one owner who pays personal income tax from the profits earned from it. This is comparatively an uncomplicated type of business to establish with a lack of government regulations.
Partnerships are an arrangement that includes two or more people who oversee a business' operations. They are also required to share in their profits, assets, and liabilities.
This kind of business is formed such that it pays the least amount of taxes compared to other corporations. This is done by letting the shareholders file taxes using the company’s income or losses. An S Corp has to file with the IRS but must adhere to specific rules.
These are a legal structure for corporations where the owners and shareholders are taxed separately from the entity. They are also subject to corporate income taxation.
A tax calculator is considered a knight in shining armor for someone who wants to calculate their quarterly taxes. It is a tool that can accurately help you determine the tax that you or your business owes under the old or new tax regime for the particular financial year/quarter.
Small businesses involve a lot of tedious and stressful tasks, and filing quarterly taxes manually can leave room for a lot of error and can be a mind-numbing process.
On the other hand, a tax calculator provides for a systemic and accurate process. But the catch is that you must enter the correct information for accurate results. Furthermore, a tax calculator takes you step-by-step and so that you can be cautious when entering all the necessary details.
Luckily, the IRS has not changed the deadlines that come up with filing the federal income tax. The due dates for 2021 are as follows:
- April 15, 2021 – First quarter
- June 15, 2021 - Second quarter
- September 15, 2021 – Third quarter
- January 15, 2022 – Fourth quarter
Corporations are to pay their quarterly taxes on the fifteenth day of the 4th, 6th, 9th, and 12th months of the fiscal year. These will align with the individual deadlines, with the exception of the fourth quarter.
Failing to pay your quarterly taxes can result in penalties. These could be anywhere between 6-8% of the amount that is underpaid.
So, if you made a profit of $10,000 and owe an amount of $2,000 in taxes but failed to pay them, you might be subject to paying 6% of the $2,000, which is about $120.
It's now time to crunch some numbers to figure out how much you'll owe for a quarter. This is just an estimate of the payments. It is to be purely carried forward based on your income, eligibility, tax year, and filing status, all of which will vary. You can ease the process with the use of a quarterly payment calculator.
Let's consider the case of a small business like yours. You may expect it to bring in $50,000 in gross self-employed income. After deducting the business expenses, the estimated taxable income stands at $35,000.
Using this example, and with the current tax rate, you would owe around $4,000 in income taxes. The self-employment tax is generally 15.3% of your net income, which means you’ll owe $4,950 for the year. Adding both will lead you to the estimated taxes for the year.
In this case, Income tax + Self-employment tax = Estimated annual tax,
$4,000 + $4,950 = $8,950
Since we now know that you owe more than $1,000 in taxes, the estimated annual tax is what you will base your quarterly taxes on. Thus, you can now divide the amount by four to find out how much you'll pay every three months.
$8,950 / 4 = $2,238
Now that you have an estimate of how much your business owes for the quarter, the final step is as simple as paying the amount to the IRS. There are several payment options available.
Online payment: You can head on to the IRS payment page and set up your online payment for the taxes due using a debit card.
Phone payment: All you have to do is enroll yourself into the Electronic Federal Tax Payment Services and use their voice payment system to make the payment.
App payment: You can also make your quarterly tax payments through the IRS2Go app on your phone or tablet.
Cash/Check payment: You can always use the old-school mode of payment of cash or a check. You can make your way to the local IRS office or mail in a check or money order.
It is safe to say that the COVID-19 pandemic affected small businesses the most, especially the creative businesses since they are not deemed "essential." These businesses faced tremendous challenges due to the stream of lockdowns imposed since early 2020. Fortunately, the IRS made some adjustments to the tax deadlines in the first half of 2020 to ease their burden.
As a result, the deadlines for the first two quarters were pushed from April and June to July 15. One positive thing was that the IRS announced no fines for the late payment of taxes during this period. While the pandemic was still ongoing, the deadlines for the third and fourth quarters were unchanged.
Running a small creative business can be fun yet challenging. Add to that the chaos of the coronavirus pandemic and small business owners need all the help they can get!
At Fincent, we strongly believe that you were born to create and not get stuck with bookkeeping. Leave your business' bookkeeping to us while you focus on what is most important - growing your business!