How to Calculate Your Business' Quarterly Taxes
Editor’s note: Please be aware that we’re not tax professionals and this is not tax advice, just a general guideline.
If you’re self-employed, there’s one major issue that can be a pain: taxes. You get to pay taxes not just once each year, but quarterly! This can be stressful whether you’re just starting out or just trying to stay on top of your taxes.
Photo by Blake Wisz
How do you know how much to pay? How do you ensure you aren’t overpaying or underpaying? It can be a confusing process, to say the least. But we’ve compiled a quick guide on how to calculate business taxes and how to get started with filing business taxes.
Look at your profit and loss statement
One of the most important financial documents for your business is the profit and loss statement. Hopefully, you have accounting or bookkeeping software that can create this report easily for you.
The profit and loss statement shows all of your income and all of your expenses. It takes the total profit and subtracts the total amount of expenses to show your net earnings. Typically, you’re taxed on your net earnings as many business expenses are tax-deductible.
Consider self-employment tax
When you have a nine-to-five job, your employer pays half of your Social Security and Medicare taxes. But when you’re self-employed, you’re both employer and employee so you pay it all. The self-employment tax rate covers Social Security and Medicare for self-employed folks and is 15.3% — 12.4% for Social Security and 2.9% for Medicare.
So it’s important to take that into consideration as you calculate your business’ quarterly taxes. That’s just the base of what you’ll be expected to pay and doesn’t take into consideration your income tax rates or any state income tax rates. Some general guidelines state that you should save 30% to 40% of your income for taxes (another reason to always charge what you’re worth!).
Calculate with Form 1040-ES
The IRS has Form 1040-ES for self-employed folks, which also comes with a nifty guide to calculate your business’ quarterly tax payments. On page six of the form, you can find 11 steps to take to calculate your estimated quarterly tax payments.
There’s a special calculation that the IRS has devised that pretty much ensures that you’re on the right track with estimating your taxes. You must pay at least 90% of your taxes, according to IRS rules, to avoid any penalties.
Work with a tax professional
You can try to DIY-it and calculate your own business’ quarterly taxes. But if the IRS formula gives you a headache and you want the most accurate numbers, working with a professional is best.
You can work with an accountant who can crunch the numbers and ensure you’re sending in the right amount to Uncle Sam. You can try to find an accountant that specializes in working with people in your specific profession so they understand how your business works and what types of expenses and deductions you can claim.
Accountants can also stay on top of your numbers and make sure your records remain accurate. If you have a big boost in your income or lose a major client, for example, they can re-assess the quarterly tax payment so you can avoid any penalties or suddenly owing a huge tax bill.
Filing business taxes
You want to stay on top of filing business taxes for your quarterly payments, which are typically due on the 15th of January, April, June, and September. This year’s business quarterly taxes are due September 16th as the 15th falls on a weekend, so you have an extra day!
You can sign up for the Electronic Federal Tax Payment System to make federal payments online. Additionally, you’ll want to find your local state tax payment system online as well. Each state varies.
Part of being a business owner is staying on top of your financials and unfortunately, that includes paying more taxes, more frequently than other workers.
If you need help or guidance, get in touch with a tax professional who can assist you. Need help with your personal numbers, too? We can help. Schedule a call with a financial coach.