What are estimated quarterly tax payments to the IRS? Why do I have to send them?
Our federal taxes are a "pay-as-you-go" system. When you're an employee, federal taxes are taken out of each check. If you are self-employed, the IRS requires that you send in tax payments throughout the year. For the smallest business, this is required 4 times. (Larger businesses may have to end in more often.)
I just had to make a report to Washington State and send in Sales Tax. Is this the same thing?
Great question and No. Every level of government wants to tax you...and it's easy and reasonable to get them confused.
Washington State - collects Sales Tax, B&O tax, and Use Tax. Some businesses report annually, some report quarterly.
The Federal Government (IRS) - collects Income and Self-Employment Tax. We file an annual report, but we're asked to send in estimated tax payments throughout the year.
This post is about tax payments to the IRS.
Do I have to send in the estimated quarterly payments (EQ$) to the IRS? What happens if I don't?
Technically speaking, YES—the letter of the law is that if a person is doing business, they must send payments in each quarter. In some cases, if you don't send in your EQ$, you'll have to pay a penalty.
The reality: I've met many self-employed folks who did not send in their EQ$ the first year, and they had no penalties, or the penalties were very low. Having said that, the IRS may choose to more vigorously enforce this rule at any time.
In some cases, if your income is low enough, it is allowable to NOT send in payments. To see if this applies to you, click here to read more (scroll down to page 24), or call the IRS at 800.829.4933
How do I calculate payments?
If you filed business taxes last year, usually your tax preparation software or accountant will provide you with a recommended amount for you to pay. It'll be based off of your earnings for the previous year.
If you are a brand new business, you'll need to calculate an amount to pay. There's a formula and worksheet below.
An important note: it's common for new businesses to grow quite a bit from year to year! Because of this, the estimate made for the quarterly payment can be too low. ProTip: Always transfer 30% of all business deposits into a savings account for taxes you may owe. (40% if you collect sales tax.) If what you're saving is more than what your EQ$ require, you can either....send in extra money for each EQ$. OR, hold the money in your account until you file your federal taxes.
Simplified Formula for Calculating EQ$ + Worksheet
Click on the worksheet for a PDF version for download.
1. Estimate your Gross Sales - all the money you'll collect from buyers/clients. (Never include Sales tax in the amount.)
2. Estimate your costs of doing business.
3. Subtract the costs of business from your Gross Sales.
Example: $12,000 - $3000
4. The answer is your Profit or Income.
5. Estimate your tax owed. Multiply your profit by .30.
Example: $9000 x .3 = $2700
6. Divide tax owed by 4. This is the amount to use for your EQ$
Example: $2700 / 4 =$675
When are they due? How do I send them in?
They are due on the following dates each year. If a date falls on a weekend or holiday, the deadline is extended to the next business day.
You may submit payments electronically or through snail mail. Click here to read more on How To Submit EQ$.
ProTips + Doing Yourself a Favor
ProTip: Each year after you file taxes, print off all your Payment Vouchers. Find four envelopes and put stamps on them. Put these vouchers + envelopes in a visible place, for example, pin to a bulletin board, set on your bookshelf, or clip to your fridge.
ProTip: Add these dates to your calendar right now: Jan 1, Apr 1, Jun 1, Sep 1. Prep and send your payments on these days.
Do yourself a favor and send these payments in! If you skip these payments, it can be very tempting to spend the money from your account......leaving you high and dry next April! In addition to making your future brighter, it can feel very satisfying to mail the checks, and gives peace of mind right now.
Jenny Girl Friday
Read more on the official FORM 1040-ES info sheet on the IRS.gov site.