This article was written by Jennifer Clark, Content Marketing Manager at TaxJar and is for educational purposes only. For tax advice related to your specific business, be sure to consult a reputable accountant.
Owning your business can be a lot of fun and provide flexibility and the opportunity to call the shots. In fact, it can be tough to return to the corporate setting after years of working for yourself.
But with that freedom come the downsides to ownership, like when and how much to pay in taxes. These quarterly estimated taxes (QETs) can complicate your business if you don’t pay careful attention to filing dates. If you’re used to an employer paying your taxes and are new to paying your own, here are a few tips for paying quarterly estimated taxes.
Organize your records.
If you’re unaccustomed to keeping receipts and tracking spending in any kind of record-keeping program, you’ll want to create a system to log all your records. Items such as pay stubs and receipts for coffee meetings, client dinners, or trips to the craft store are all vital to filing.
There are various systems and methods for tracking receipts, so find what works best for you and stick with it. Accounting software makes it easy to quickly search for an expense when you need the information at a moment’s notice. TaxJar, for example, can sync with your Square account to help you keep everything organized.
Establish a schedule.
Next, and perhaps most important, you need to know when your quarterly estimated taxes are due, and when to file them. One missed filing and payment can start a chain reaction of getting behind, so take note of these dates so you don’t forget them:
Q1: April 15, 2020
Q2: June 17, 2020
Q3: September 16, 2020
Q4: January 15, 2021
The deadlines are the same every year. If it falls on a weekend, the deadline moves up to the next weekday, so make sure to keep these dates handy each year.
Know how to pull them off.
After you establish the habit of better record keeping and understand the due dates, it’s time to know how QETs actually work. Simply put, these taxes replace those your employer would withhold if you worked in a typical corporate job, instead of being in business for yourself. Rather than someone else remitting those taxes on your behalf to your state’s taxing authority and the IRS, it’s now entirely up to you.
All the paperwork you’ve saved up to now becomes important. As you begin adding your receipts over the past year (or as much as you have since you started), you want to include the revenue your business earned. Whatever you made over the past year, divide it by four and use the IRS tax table to determine what you owe on taxes for that amount.
After that’s done, congratulations! You’ve just figured out your first payment. You must pay at least this amount on all those dates listed above. As the year progresses, you need to keep up with your income to ensure you’re not underpaying. If you do underpay, the IRS might hit you with a penalty, usually around the time you’re doing your yearly taxes in April. If you keep up with everything, however, you should be fine. The penalties are mainly used to prevent people from skipping the QETs.
Further, you want to keep up with your receipts and other expenses for when you also file your annual taxes. If you did happen to underpay, use as many deductions as you possibly can to keep you from experiencing an empty wallet.
When filing and paying your taxes, one option to check out is EFTPS. It’s provided free by the Department of the Treasury and can get you paid up and squared away quickly. This way you can go right back to running your business without any interruptions.
Know about safe harbor.
Some years are great for business, while others aren’t. It happens, sadly, and the IRS knows it. With this in mind, you need to know about the safe harbor rule.
Here’s how it works. As long as you pay the same amount in your quarterly estimated taxes as you paid the previous year, you won’t get hit with crazy fees or anything from the IRS. For example, say you paid $750 in taxes last year. This year, though, your profits increase (congrats) and you find that you actually owe $3,000 in taxes.
Rather than get hit with that out of the blue, you simply need to pay the same $750 as last year to fit under the safe harbor rule. This means that the fees and penalties you would normally incur by underpaying won’t apply to you. Keep in mind that the next year, you’ll have to pay at least $3,000, but that’s a problem for the future. Plus, if you’re that successful, this is a good problem to have.
Use it for practice.
Understandably, QETs can be a burden for small business owners. Paying taxes quarterly can be cumbersome, especially when you need to file both business and personal taxes. Don’t look at QETs as a chore, but rather, view them as a type of practice.
It’s hard to get intimidated by taxes when you’re doing them all year long, so why not use the experience to establish your organizational methods. This way, when “the big dance” comes around in April, you’ll be ahead of the game.
TaxJar is a service that makes sales tax reporting and filing simple for more than 15,000 online sellers. Try a 30-day free trial of TaxJar today and eliminate sales tax compliance headaches from your life.