A quarterly estimated tax is how you pay Uncle Sam on income not subject to withholding, an important part of running your business properly. You won’t walk away from this article a CPA, but rest assured that you’ll have a better understanding of what’s expected from you as a small business owner. Here’s a few key concepts to help you grasp what can often be an unnecessarily complicated subject.
The Term Quarterly
Quarterly estimated taxes aren't due at standard quarterly time intervals (i.e. every 3 months of the year). Instead, they run off a seemingly randomized schedule as follows:
1st Payment: April 15th
2nd Payment: June 15th
3rd Payment: September 15th
4th Payment: January 15th (following year)
That comes out to 3 months for the first installment, 2 months for the second, 3 months for the third, and 4 months for the final payment. The fact that these dates don't conform to standard employment tax due dates can make estimated taxes particularly confusing. Be aware of this difference and how it can affect your company—schedule accordingly.
Crunching the Numbers
Quarterly taxes can be estimated based on 100-110% of the prior year's taxes or 90% of the current year’s taxes. Because using last year’s numbers requires little to no calculation, it’s probably the more prudent choice. However, if your business’s income is trending down from the previous year, it could be advantageous to use this year’s data.
States vs. the IRS
States generally conform to IRS due dates and rules. However, there are exceptions. For example, the IRS requires 4 equal quarterly payments while California requires 30% in the first payment, 40% for the second, 0% in the third and 30% in the final payment. Be aware of what’s required in your state and adjust accordingly.
The Big Picture
This is not an endorsement for skipping your quarterly estimated taxes, but relatively speaking the penalties for missing a payment aren’t very high. However, they will become a lot worse if you don’t pay the amount you owe by the April 15th cut off. Some small business owners may opt to forgo paying their quarterly estimated taxes if having liquid cash outweighs the deferred penalties.