It seems like every other day you have to figure out some new tax situation when you own a business. If you’re not calculating your annual income taxes, you’re sending off sales taxes or some other payment to some government agency. It’s not exactly simple to keep track of especially if you’re a new business owner.
One of the most confusing of these seemingly random taxes is the Quarterly Estimated Tax, or QET. If you’ve never filed QET’s before, (or tried to and ended up with your head on your desk), it’s time to get them under control. QETs are confusing but they can be dealt with. Let’s take a look at what they are and how to handle them
Quarterly Estimated Taxes: Everything You Never Wanted to Know
What are Quarterly Estimated Taxes?
Remember back when you had a wage or salary job and a portion of every paycheck would go to taxes? Your employer sent that money off to the government agencies that collected it. The only thing you ever had to do was file the initial paperwork and get irritated at how much was coming out of your paycheck each period.
Now, though, you don’t have an employer – YOU are the employer. There’s nobody there to pay taxes for you; you have to do everything yourself, just like the rest of your business. As a result, you have to figure out how much you owe to the various government agencies holding their hands out.
Quarterly estimated taxes are how you deal with this. You don’t have regular paychecks when you’re selling items or offering services so the government merely asks that you pay your income taxes in four quarterly sums.
Quarter 1 taxes are due on April 15th (yes, it’s a cruel joke that your first quarterly payment is due on tax day.)
Quarter 2 taxes are due on June 15th.
Quarter 3 taxes are due on September 15th.
Quarter 4 taxes are due on January 15th.
Keep in mind that if you skip a quarter you need to get caught up. And if one of those due dates falls on a weekend or holiday, your payment will be due on the next business day.
How to Handle Quarterly Estimated Taxes
So now you know what they are – what in the world are you supposed to do with them? QETs may seem a little scary, but they’re really not all that bad…if you get them under control. This also means getting your business finances under control first.
First, you need to get everything organized. If you’re not already managing your business finances with Outright, you’ll need to gather all your invoices or bill of sales together from the past quarter. While you’re doing this, go ahead and start putting them in some semblance of order. Folders, perhaps, or digitize them and put them on your computer either by scanning or sending them off somewhere like Shoeboxed. This will help you when you need to pull something up quickly.
You should also enter all of your business expenses before calculating quarterly estimated taxes. Expenses = tax deductions and if you don’t enter them before calculating how much you owe, you may be giving the government a giant loan of your hard-earned money.
If you use Outright Plus, you have a short cut here. Navigate to your “Taxes” tab and then the “Quarterly Estimated Taxes” sub tab. This page will give you a conservative estimate of what you owe in quarterly estimated taxes. Keep in mind that Outright has no way to determine your personal tax credits for things like children, mortgage interest or education, so this estimate might be high.
From here, you’re going to estimate how much you will owe in taxes at the end of the year, based on how much income you’ve made this year so far. For example, if you determine that you’ll owe $10,000 in taxes in April, you should divide that number by four and pay $2,500 each quarter to stay current. And if you’re business is experiencing unprecedented growth and you’re not use how much you will owe – don’t panic! The IRS’s Safe Harbor Rule means that you are exempt from penalties and fees as long as you pay 90% of the amount you owed in taxes last year in quarterly estimated taxes this year. The amount you owed in taxes last year can be found on your form 1040.
Since you’re estimating the amount of income and expenses your business might have over the year, you may discover in April that you were a bit off. This is no problem – you’ll just send in or receive money to make up the difference.
If you have more questions about quarterly estimated taxes, check out the Online Seller’s Tax Guide!
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