If you are a new entrepreneur who is starting a business for the first time, one of the biggest differences between being a business owner instead of an employee is how you pay taxes, which includes estimated taxes.
Estimated taxes are essentially payments made in advance, based on what you estimate you will make during the year. In an employee/employer situation, your employer would withhold income and payroll tax to pay to the IRS on your behalf. When you own a business, and are self-employed, you need to make that payment yourself through estimated taxes.
Here are a few common questions (and answers) about quarterly taxes to get you prepared for your responsibilities as a business owner.
When is Form 1040-ESS Due?
According to the IRS, the deadlines for estimated tax payments (the payments you make with Form 1040-ES) are made four times per year on the following dates:
- April 15
- June 15
- September 15
- January 15 (of the following calendar year)
You make quarterly tax payments during the current “tax year” that you’re paying taxes for, with the exception of January being in the next calendar year. The next payment date for 2020 estimated taxes is on January 15, 2021.
Also be aware that the April 15 quarterly tax deadline for 1040-ES (estimated) tax payments is separate from the April 15 deadline to file individual tax returns. You have to file your individual tax return on or before April 15 (“Tax Day”), but you also have to make your quarterly estimated tax payment for the current year’s first-quarter income on that day as well.
Depending on the year, some of these deadlines might shift a bit depending on days of the week or bank holidays. Check the IRS website for confirmation.
Do Single-Member LLCs Pay Quarterly Taxes?
The LLC as a company does not pay taxes. LLCs are considered “pass-through entities” that do not have to pay corporate income tax. The LLC’s business income simply “passes through” to the individual tax return of the business owner.
As the business owner, you will pay estimated taxes on your estimated earnings from your LLC. You will also file a Schedule C form at tax time to report your profit or loss from your business.
How Much Money Should I Reserve for Estimated Taxes If I am Self-Employed?
Your exact tax liability will depend on where you live — some states have higher state income taxes than others, some states have no state income tax — and how much money you make.
A general rule of thumb is that you should try to save 25–30 percent of your income for taxes. A smart way to do this is to take 25 or 30 percent of each payment you receive and set it aside in a business savings account. If you pay too little in estimated taxes, there can be underpayment penalties. Follow the 25–30 percent rule to ensure you are estimating correctly.
Should I File Estimated Taxes If Just Have a Side Business?
Even if you are earning just a small amount of income from your side business, you are required to report that income. If you want your business to be legitimate, and not classified as just a “hobby,” it is a good idea to start reporting income from your business (and paying taxes on it, as needed) even while you are still moonlighting or doing a side hustle. The IRS says that if you expect to owe at least $1,000 in tax for the current year (minus your withholding and refundable credits), then you should make estimated tax payments.
Can I File My Own Business Taxes?
Yes. You can file your tax returns and make estimated payments by yourself, whether you want to file returns on paper (the “old fashioned way”) or use tax filing software. The IRS has an Electronic Federal Tax Payment System (EFTPS) where you can enroll and pay your taxes due.
However, as a business owner, your taxes are more complex than they are for an employee. You might be better off working with an accountant to do the heavy lifting for you. Working with a tax professional can help you maximize your tax-deductible business expenses and minimize your tax liability; you will also have peace of mind that your taxes were tracked and filed correctly.
Incfile has a Business Accounting service that can walk you through the steps of paying taxes as a business owner. Take advantage of our free tax consultation to see how we can help you make sense of tax time.