As a business owner, there is a lot for you to keep in mind. One item often overlooked, especially by those just starting out, is taxes. Until the tax bill comes due, many business owners don’t realize just what they owe — and many don’t think about the need to pay quarterly taxes throughout the year.
“Anytime you have an income that is not subject to withholding, you need to pay quarterly taxes,” says Ed Snyder, CFP®, the founder of Oaktree Financial Advisors. He points out that this income includes income from self-employment, as well as from interest and dividends, and prizes and awards.
If you don’t have someone else withholding taxes from your paycheck, you probably need to pay your taxes on a quarterly basis. “You may also need to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough,” he continues.
Snyder says that, in most cases, you need to pay estimated tax if you expect to owe at least $1,000 in tax. If you don’t make your quarterly payments on time, instead waiting until tax time to make one lump sum payment, the IRS can charge interest and penalties for missing your regular payments. In order to avoid that extra expense, it’s a good idea to plan ahead for paying quarterly estimated taxes.
Planning Your Quarterly Estimated Tax Payments
The IRS understands that business owners are likely to earn more money one year than another, so there are ways around paying interest and penalties, even when your tax bill amounts to more than $1,000. As long as you pay 90% of the tax shown on your current year tax return, or 100% of the tax shown on your prior year tax return, you can escape penalties — as long as you have been paying quarterly.