Estimated tax is a quarterly payment of taxes due that is based on the filer’s stated earned income for the period. The majority of business owners who are required to pay quarterly taxes are small business owners, freelancers, and independent contractors.
Many business owners are surprised by tax bills when they first start out or when they begin to generate profit. They are caught off guard since they are unaware that they must pay estimated taxes on their company revenue.
A penalty may be imposed if you do not pay enough tax through withholding and anticipated tax payments. Even though you are due a refund when you submit your tax return, you may be charged a penalty if your estimated tax payments are late.
Businesses must pay estimated tax if their tax burden is projected to be at least $500. Furthermore, employees who had too little tax withheld and therefore owing to the government taxes at the end of the previous year must make estimated tax payments.
Why is Estimated Tax important?
As a small business owner, you must pay your business income taxes through your personal tax return. Your business income is also subject to Social Security and Medicare taxes.
Your payments to yourself as an owner are considered as an owner’s draw rather than a salary, and no taxes have been deducted as they would from an employee’s paycheck. This is where estimated taxes come into play. To prevent fines and interest on late payments, you must pay estimated tax quarterly.
Estimated taxes are calculated and paid using IRS Form 1040-ES for a given tax year. A taxpayer who had no tax due the previous year, was a United States citizen or resident for the whole year, and had the previous tax year cover a 12-month period is exempt from filing Form 1040-ES.
Payments are due four times a year:
- 1st payment – April 15 (except for 2021 payments due June 15)
- 2nd payment – June 15
- 3rd payment – September 15
- 4th payment – January 15 of the next year.
Silicon Harbor Business Services is based in Mount Pleasant, SC. We provide solid, practical advice to small business owners and select individuals. We work with Quickbooks Online, Quickbooks Desktop, and Quickbooks Enterprise.
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