The IRS and state agencies are pay as you go, meaning they don't want to wait until your tax filing to get the taxes owed on income earned. To avoid penalties and interest associated with waiting, estimated taxes are paid at specific dates throughout the year on your profit to essentially pay your tax burden in advance.
How Taxes Work
Whether you work for yourself or for a company, the expectation is that you'll make estimated payments throughout the year via payroll taxes (W2 wages) or quarterly payments (self-employed income). When it's time to file your tax return, you are essentially settling up - your income is added, and the tax owed is calculated to determine tax due. Then your payments are included - how much was withheld from your check, along with the estimated quarterly taxes you paid throughout the year. The result of whether you get a refund or not is based on the difference between the two:
If you paid more than it turned out you owed, congratulations, you're getting money back!
If you owe more than your payments total, you'll have to pay the remaining amount with your filing.
Who Needs to Make Estimated Payments
If you expect to owe more than $1,000 in taxes, you'll want to make estimated payments to the IRS. As you might expect, states require different thresholds in order to be required to pay.
TIP: Best practice is to make it a habit to make estimated payments each quarter regardless of how much you owe to help you get in the habit, and help you better understand how doing so affects your filing next year.
Since estimated taxes aren't automatically withheld, it's up to you as the small business owner to pay on designated dates throughout the year. The IRS deadlines are as follows:
Q1 | April 15 (for the period January 1 - March 31)
Q2 | June 15 (for the period April 1 - May 31)
Q3 | September 15 (for the period June 1 - August 31)
Q4 | January 15 (for the period September 1 - December 31)
TIP: These are the Federal requirements. Check your state to confirm whether they follow the same deadlines throughout the year.
Calculating What to Pay
Remember, what you are calculating is an estimate. You're trying to avoid as much of a surprise as possible, but making estimated payments is not a guarantee that you won't owe at the end of the year. There are some baseline percentages that you can use to determine how much to give:
IRS: at least 30% of profit
State: generally 5-8% of profit, depending on the state
To add an extra twist, the IRS requires that you meet the following requirements to avoid additional penalties or interest at filing:
90% of the total tax due on the current tax return, or
100% of the total tax due last year
TIP: Keep this in mind with your final payment for the year to ensure you're not making payments and charged extra at the end.
How to Pay
If you're a Little Fish client, this part is easy. We do it for you.
If you are DIY-ing this part, you can make Federal payments at irs.gov/payments. You'll enter information as requested for ACH or credit card payments, and pay online directly to your tax account. For your state, Google your state + quarterly payments to find the process (usually via the state Department of Revenue).