If you have worked most of your life as someone’s employee, you will be used to having your taxes withheld from your paycheck and filing your tax return once a year. If you become self-employed, however, you may need to pay estimated taxes, which are due on a quarterly basis.
According to IRS.gov, you must make estimated tax payments for the current tax year if “you expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits,” and if “90 percent of the tax shown on your current year’s tax return or 100 percent of the tax shown on your prior year’s tax return,” whichever is smaller, is less than the withholding and refundable credits you expect.
This rule applies to businesses that are not corporations, including sole proprietorships, single-member and multiple-member LLCs, partnerships and S corporations. “For all of these business types, you’ll need to look at your net income from all sources, including your business, on your personal tax return,” says Jean Murray, a certified business coach, in an October 2017 article for TheBalance.com. If you then meet either of the aforementioned IRS requirements, you must pay estimated taxes, and thus must file quarterly. Freelance workers must also do this.
In C corporations, business owners are also employees, and therefore may not need to file quarterly taxes. However, the corporation itself, as a legal entity, almost certainly does. “If you are filing a tax return for a corporation, you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file the corporate return,” Murray says.
Quarterly due dates
“For estimated tax purposes, the year is divided into four payment periods,” says IRS.gov. Each period has a specific due date. Typically, these are April 15 for the Jan. 1 to March 31 period, June 15 for the April 1 to May 31 period, Sept. 15 for the June 1 to Aug. 31 period, and Jan. 15 of the following year for the Sept. 1 to Dec. 31 period. There may at times be exceptions to these dates. For instance, in late 2017, the IRS announced that tax payments for victims of Hurricane Harvey and Hurricane Irma would get additional time to make payments.
Consulting a professional and staying on top of your taxes is vital to maintaining a healthy business and not getting behind with the IRS. “If you don't pay enough estimated taxes, and your tax bill is still too high, you can be penalized for this underpayment. You can use Form 2210 to see if you are paying enough estimated taxes and learn about the penalty rates. This is one calculation you might need help from your tax preparer to complete,” warns Murray in an October 2016 article for TheBalance.com.
The IRS states that there may be special rules regarding estimated tax for certain individuals, including farmers and fishermen, household employers, higher income taxpayers and nonresident aliens. “If you're a calendar year taxpayer and at least two-thirds of your gross income for 2017 or 2018 is from farming or fishing, you have only one payment due date for your 2018 estimated tax, January 15, 2019. The due dates for the first three payment periods don't apply to you,” says IRS.gov.
You may also be able to annualize your income if it is uneven throughout the year. “You would have to file Form 2210 … with your tax return to show us that your uneven estimated payments match up with the income that you received unevenly over the course of the year.”
As your business grows in income and complexity, it is highly advisable to hire a tax professional who can help you prepare your taxes. Though this may cost you a little extra, being proactive and avoiding the ire of the IRS is worth it.