Do You Need to File Quarterly Taxes for Your Business?
One of the primary financial responsibilities business owners and self-employed individuals must contend with is calculating and paying taxes on the money they earn. What type of taxes you’ll owe and how often can be confusing, especially if this is your first year in business.
If you’re a small business owner, freelancer, or otherwise self-employed, you might wonder whether you need to file and pay quarterly estimated taxes for your business. Here’s a basic overview of what you need to know.
Who is required to pay quarterly taxes?
Generally speaking, anyone who is self-employed will owe the Internal Revenue Service money throughout the fiscal year. For most businesses, these payments are made in the form of quarterly estimated taxes.
Corporations have to make estimated tax payments if they expect to owe $500 or greater when their return is filed. If you have employees, as an employer, you have certain tax responsibilities that you must pay, which are Social Security and Medicare taxes, Federal income tax withholding, and the Federal unemployment (FUTA) tax.
But what about individuals who earn non-W2 income? The IRS states that “individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.” In short, all self-employed workers are subject to this rule. Even independent freelancers who haven’t formally incorporated or registered a business with the government are automatically and legally considered a sole proprietor for tax purposes.
You are not required to pay quarterly taxes if your employer withholds taxes from your earnings. You also do not need to file quarterly taxes if you expect to owe less than $1,000 on your annual self employment income and plan to pay everything at once when you file your yearly tax return.
What taxes do self-employed individuals pay?
If you’re new to self-employment, you may be surprised to see that you’re paying more in taxes than you did as a W2 employee. This is because you are now carrying the full burden of your Social Security and Medicare taxes. Eemployers cover half of this tax burden for you when you’re on their payroll, but as a business owner, you’re obligated to cover it in full in the form of a self-employment tax (SE tax), on top of your regular federal income tax.
How do I calculate my self-employment tax obligation?
The IRS offers Form 1040-ES to help you calculate your quarterly estimated payments. You’ll first need to calculate your taxable self-employment income by taking your annual gross income (the total amount of revenue you received) and deducting any eligible expenses. Then, you’ll use that number to go through the 1040-ES worksheet to determine your tax obligation, which is based on your income bracket.
This worksheet can be complicated if you’re unfamiliar with it, so it’s wise to speak with a trusted CPA firm to help you make these calculations and understand what you owe the IRS.
Estimated tax payment deadlines for Tax Year 2020
If you’re a business owner or self-employed, it’s important to know when to file your taxes and how much to pay in order to avoid an Underpayment of Estimated Tax penalty.
In 2020, the coronavirus pandemic shifted the federal quarterly tax payment deadlines for Q1 and Q2 to July 15. However, the payment deadlines for Q3 (September 15, 2020) and Q4 (January 15, 2021) are still in effect. You may also pay your Q4 estimated taxes when you file your annual business tax return.
If you’re unsure whether you need to file quarterly taxes or how to calculate what you owe, contact the top-rated CPAs at Miller and Company for a consultation.