Most everyone finds calculating and paying taxes on a yearly basis to be a stressful and confusing exercise. As if startup founders didn’t have enough on their plate, paying estimated quarterly taxes is just a headache. This quarterly obligation is designed to tax business income not subject to withholdings. So this would include most startups.
So how do you estimate what you should pay? Since hefty penalties are assessed for late and/or incorrect payments, it’s crucial to know when and how much to pay. Here’s the skinny for what you need to know about quarterlies to stay in the good graces of the IRS:
- Self-employed individuals are required to pay quarterlies if they owe over $1,000 per tax year after subtracting withholding and refundable credits. Salaried employees are not required to pay quarterly taxes because their employers withhold taxes from paychecks throughout the year.
- Quarterly payments are due on April 15th, June 15th, September 15th, and January 15th. If any of these dates fall on a weekend or federal holiday, the deadline is extended to the next business day. Penalties plus interest are assessed if your payment isn’t postmarked by the due date. If the penalties don’t scare you, the unexpected tax bill at the end of the year surely will. Keeping up with the deadlines will help you stay ahead of debt and keep your company out of hot water in case profits dry up at the end of the year.
- Your total amount due is a quarter of your estimated tax bill for the year. Note that underestimating your bill can incur penalties. A good rule of thumb is to pay at least 100% of the tax you paid last year. Thomas Jensen, a financial planner from Oregon advises: “if you think you are going to make less, calculate about how much and try to pay 90%. Accountants advise quarterly tax payers assess their estimated income prior to the June and September payments to ensure their estimates are as close as possible to the real financial picture.
- The IRS does provide Form 1040ES to help business owners figure out how much they owe. Unfortunately this form is quite confusing. If you’d like to avoid at least four fewer migraines per year, you are much better off consulting a trusted accountant to help you with the math.
The IRS accepts quarterly payments via checks, credit and debit cards, as well as the Electronic Federal Tax Payment System that draws money straight out of your bank account. If you choose to pay with a credit card, you will be charged a "Tax Payment Convenience Fee” which ranges from 1.87 percent to 2.35 percent of the payment for credit cards. But the fees are tax deductible. Those using a debit card will pay a flat fee of $2.49 to $3.95.