Starting a new business enables you to enjoy the freedom you want. You are in charge and can run your business how you see fit. You can also get many tax breaks previously unavailable as an employee. Of course, it also means you may need to pay quarterly taxes.
People That Need to Make Estimated Quarterly Payments
People with income not from an employer, such as business owners, contractors, and freelancers, need to make quarterly tax payments. The payments may also be called estimated tax payments. They are based on your quarterly income.Other people may also need to make Internal Revenue Service-estimated tax payments. Score reveals that shareholders in an S- and C-corporation also must make these payments. Sole proprietors, partners, and S-corporation shareholders must make estimated tax payments if they owe more than $1,000 after subtracting all deductions. C-corporation shareholders must make estimated tax payments if they owe more than $500 after subtracting all their deductions.
What IRS Quarterly Payments Should Include
Quarterly payments must include more than just taxes on your business income. These payments must also include the money you owe with your self-employment taxes, such as your Social Security and Medicare payments for yourself and any employees you have for the quarter.Besides those earning self-employment income, other situations may require you to pay estimated taxes. HRBlock says that you also may be responsible for quarterly taxes if you make money from the sale of stock, interest, dividends, rent, or sell a house. Income from unemployment compensation, alimony, and the taxable part of your Social Security benefits also must be included.
Selling a house only requires tax payments if it does not qualify for an exclusion. Learn more details about what taxes are due after selling a house from IRS Publication 523.
When Business Owners Do Not Need to Make Estimated Tax Payments
Some self-employed people do not need to file estimated taxes. Bench mentions that it is unnecessary if you have been a U.S. citizen all year, did not file a tax return in the previous year, or if your tax year was 12 months long.Sole proprietors and others not expecting to owe more than $1,000 do not need to file federal estimated taxes. Instead, they report all their taxes on their regular tax forms.
Calculating Your Estimated Taxes
When you are going to calculate how much you owe for the quarter, the IRS expects you to include all anticipated income. It includes taxable income, adjusted gross income, other taxes, credits, and deductions. They want a serious estimation, which means you cannot take a wild guess at what you might owe.The IRS suggests that you start your calculations using your previous year’s income tax forms. Since only accurate (as possible) quarterly payments will result in avoiding tax penalties, you want to spend some time making it as accurate as possible. IRS Form 1040-ES will help you get the necessary estimates. You can fill out this form each quarter to ensure better accuracy. Non-resident aliens need to use 1040-ES (NR).
Quarterly payments may be unnecessary if you earn money from an employer and have asked them to increase your withholding on your W-2 wages. To ensure it will be enough, you can use the IRS’s Tax Withholding Estimator. Once you know how much to withhold, change the amount to be withheld on a new W-4 and give it to your employer.
When the 2023 Quarterly Payments Are Due
When working for yourself, the IRS expects each payment before specific deadlines. The quarterly tax payment dates are as follows:- 1st payment: April 18, 2023
- 2nd payment: June 15, 2023
- 3rd paymen: Sept. 15, 2023
- 4th payment: Jan. 16, 2024
Penalties for Not Paying Quarterly Taxes
The IRS may charge penalties for various reasons. They include making late payments, not paying enough, or paying too much. Penalty charges are 0.5 percent for being late, but there is an additional charge per month your taxes are overdue, up to a maximum of 25 percent of taxes.When Penalties Do Not Apply
The IRS says there are some circumstances when they will not charge a tax penalty even if you have not paid all you owe. These circumstances, often referred to as safe harbor rules, include:- owing less than $1,000
- paying at least 90 percent of this year’s taxes
- paid 100 percent of last year’s taxes, or 110 percent if you earned more than $150,000 ($75,000 if married and filing separately)
- could not make payments due to a disaster or unusual circumstance
- now retired (after reaching 62) or disabled and had a reasonable cause—but not because of neglect.
Reduce Your Taxes by Claiming Deductions
You can reduce your taxes considerably by learning about what deductions are available for business owners. Many can be claimed including nearly all reasonable expenses and business travel.Advantages of Making Quarterly Tax Payments
An important benefit of making quarterly tax payments is not having to come up with the money at the end of the year. Your business could have a down season in the last quarter, and you might not be able to come up with all of it if that happens.Paying the federal estimated tax payments each quarter also enables you to adjust them if your income varies throughout the year. You can also make them more often if you prefer—even making them weekly or monthly.
The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
