How to Calculate Quarterly Estimated Taxes, for Small Businesses

Businesses have to pay income taxes. We touched on this briefly in our overview article on the types of taxes businesses have to pay. But, in the US, you have to pay your business’s income taxes in four quarterly payments. You can’t wait until the end of the year, figure out your income taxes, and pay everything all at once. If your business’s revenue is fairly steady, estimating your quarterly taxes isn’t particularly hard. Most businesses, however, have unpredictable up and down quarters. So how can small businesses calculate quarterly estimated taxes? We suggest a few ways below.

But, before we get to calculating how much you have to pay, let’s go over when you have to pay. The answer can be different depending on the type of business entity you’re operating under.

Businesses Pay Their Estimated Income Taxes Every Quarter

In the US, there are four general types of business formats: sole proprietorship, partnership, LLC, and corporation. Every one of these business formats are required to pay quarterly estimated taxes. But exactly when they have to pay depends on the business’s fiscal year. (A fiscal year is any consecutive 12 months period used as a “year” for accounting purposes.)

Sole Proprietors, Many Partnerships, and Some LLCs Follow the Calendar Year for Paying Quarterly Estimated Taxes

If you’re a sole proprietor or a single member LLC filing your taxes as a disregarded entity, then your fiscal year is the calendar year. This is because you must file your business taxes with your personal taxes, and your personal taxes follow the calendar year.

There are a few exceptions to watch out for, however. A single member LLC with a corporation as its sole owner files the LLC’s taxes along with the corporation’s tax return. So, if the corporation uses a non-calendar fiscal year, then the LLC uses that same fiscal year.

For partnerships, their fiscal year depends on the fiscal year of the majority of the partners. So, if all the partners are people, then you’ll follow the calendar year. But if the partners are legal entities like corporations, see below for when to file.

Corporations, Some Partnerships, and LLCs Electing to be Treated as Corporations File Quarterly Estimated Taxes According to Their Fiscal Year

Corporations can pick their own fiscal year. Most of them pick the calendar year, but they don’t have to. Technically, they can pick any month of the year to be the start of their fiscal year.

If an LLC chooses to file taxes as a corporation, then it can also pick the start of its fiscal year just like a corporation can.

A partnership files its taxes based on the fiscal year of the majority of its partners. So, if the partners are corporations, for example, then you might be filing your quarterly taxes based on the corporation’s schedule. But there are other detailed rules on how to determine a partnership’s fiscal year. So, if in doubt, check the rules so you get it right.

Due Dates for the Quarterly Estimated Taxes

Based on your fiscal year, your quarterly taxes are due on the 15^th day of the 4^th, 6^th, 9^th, and 12^th months of your fiscal year.

If you pick the calendar year, then your quarterly taxes are due on:

• April 15^th
• June 15^th
• September 15^th
• January 15^th (December 15^th for corporations)

If the due date falls on a holiday, then you file the next business day.

What’s Included in Your Estimated Taxes Depends on the Business Entity

Depending on the type of business entity you’re operating under, your estimated taxes may or may not include FICA (i.e. Social Security and Medicare) withholdings. These withholdings are often called the self-employment tax. And, if your home state has a state income tax, you might have to pay additional state and local estimated taxes as well.

If you’re a sole proprietor, a partner, the owner of a single member LLC taxed as a disregarded entity, or a multi-member LLC treated as a partnership, then you have to pay both your business’s quarterly estimated income tax as well as your own FICA taxes every quarter.

But, if you’re a corporation or an LLC taxed as a corporation, then you only have to estimate and pay your quarterly income tax. You can skip the self-employment tax because everyone who works for a corporation is an employee. With every paycheck to an employee, the business has to withhold the employee’s personal income tax and FICA tax and remit these withholdings on a different schedule. So, your businesses’ quarterly estimated taxes won’t need to include your self-employment tax.

To be clear, quarterly estimated income taxes include:

• Income tax and self-employment tax for sole proprietors, partners, and LLC owners who are treated as sole proprietors or partners
• Income tax only for corporations and LLCs taxed as corporations

What Happens if You Don’t Pay or Underpay Your Quarterly Estimated Taxes?

If you’re a corporation and expect to make $500 or more in income for the year, you’ll have to pay quarterly estimated taxes. For every other type of business entity, if you expect the business to have $1,000 or more in income for the year, you’ll have to pay quarterly estimated taxes.

If you don’t pay or don’t pay enough of your income taxes every fiscal quarter, then, at the end of the year, you might have to pay a penalty for the underpayment. To avoid this penalty, you’ll have to either pay at least 90% of the taxes you owe for the current year or 100% of the taxes you owed the previous year, whichever amount is smaller.

So, to avoid penalties, your goal is to figure out your estimated quarterly taxes to as close to the final amount as possible. The IRS suggests a couple of ways for you to do this. It doesn’t matter which way you pick, as long as you pay enough each quarter.

The Easiest Way to Calculate Your Quarterly Estimated Taxes is to Hire a CPA

It sounds flippant, but we’re deadly serious. The easiest way to figure out your quarterly estimated taxes is to hire a CPA. Quarterly tax calculations can get quite complex, especially if you have to deal with both state and federal income taxes and if your business’s income is uneven throughout the year. It’s best to let a professional handle it. Not only that, a CPA would know of other tax saving strategies that might help you save more. If you don’t have a CPA yet, here’s our article on how to find a CPA in your area.

Other than a CPA, the only other easy way we know to calculate your estimated quarterly taxes is with QuickBooks Self-Employed. You can use this software if you’re a sole proprietor or a single member LLC. It’s best suited for service businesses with no employees, but if you have just a little bit of inventory, you might be able to make-do with the software. For more information on QuickBooks Self-Employed, take a look at our article on accounting software.

If you can’t use QuickBooks Self-Employed and do not wish to hire a CPA, you’ll need to manually calculate your quarterly estimated taxes. Let’s start with the lowest hanging fruit: situations under which you don’t have to pay quarterly estimated taxes.

Special Circumstances Where You Don’t Have to Pay an Estimated Quarterly Tax

Under some limited circumstances, you won’t have to pay an estimated quarterly tax. These circumstances are:

• When you didn’t have to pay an income tax the previous year
• When you have a job as an employee and have increased your W2 withholdings enough to cover your business’s income taxes
• If your business did not make a profit
• If your business is a corporation and it made less than $500 for the year
• For businesses that are not corporations, if you made less than $1,000 in profit for the year

If you think your business falls under these exceptions, double check this IRS page to confirm before you skip paying estimated taxes. If you’re not sure, our advice is to pay. This way, you can avoid a penalty if you get it wrong. You’ll get any overpayment back at the end of the year as a tax refund.

You must pay your business’s income taxes quarterly. Even if you pay the full amount at the end of your fiscal year, if you’ve underpaid, the IRS will still fine you if you haven’t paid every quarter.

How to Figure Estimated Quarterly Taxes Yourself

If you do have to pay estimated quarterly taxes but do not wish to hire a CPA, then you can calculate your estimated quarterly taxes yourself. There’s an easy way, and there’s a harder way. We’ll explain both below.

If your state taxes your business’s or your personal income, don’t forget to file estimated taxes with your state too. We only go over how to calculate your federal estimated taxes below. Each state will have a slightly different form you’ll have to fill out to calculate your state taxes. But the calculations are usually the same as the one you use to figure out your federal taxes. To stay safe, be sure to verify the method with your state’s tax authority.

Calculate Your Quarterly Estimated Taxes with Form 1040-ES or Form 1120

When a business files its yearly federal income taxes, they’ll either use Form 1040, Form 1065, or Form 1120/1120-S. Form 1040 is for sole proprietorships, LLCs that are treated as sole proprietorships (called disregarded entities), individual partners in a partnership, and S corporation shareholders. Form 1065 is for partnerships. And Form 1120 is for C corporations while Form 1120-S is for S corporations.

But, for quarterly estimated taxes, you’ll only need either Form 1040-ES or Form 1120. Form 1120 is for C corporations and LLCs that choose to be taxed as C corporations. Form 1040-ES is for all other types of entities. You only use these forms to calculate your estimated taxes. You send in the money but not the forms.

Both the yearly and estimated taxes for C corporations can get very complicated. And small businesses tend not to be C corporations. This is why, if you have a C corporation, please hire a CPA to help you with your taxes. Dealing with complex tax situations is beyond the scope of this article.

For most small businesses that are not C corporations, income from the business is passed through to the individual owners and paid with their individual income taxes. This is why they calculate their estimated quarterly taxes using Form 1040-ES. (There are exceptions, when, for example an LLC is owned by a corporation. But this is beyond the scope of this article.)

For sole proprietorships, partnerships, and LLCs filing as disregarded entities, you’ll also have to include your FICA taxes along with your estimated income taxes. For S corps and LLCs filing as S corps, you only have to file estimated income taxes for your business. You won’t have to file FICA taxes because those are filed when you file your payroll taxes.

For Businesses with Steady Revenue, It’s Fairly Easy to Calculate Your Quarterly Estimated Taxes

For some small businesses, the easiest way to pay your quarterly estimated taxes is to take the taxes you paid the previous year, divide it into 4 payments, and pay that each quarter. Lots of income tax software will print out your estimated taxes vouchers based on this method. You can then file your taxes at the appropriate time, paying the amount on the voucher.

But this method assumes your business’s revenue is steady for the year. If your business tends to be seasonal or if you’re experiencing a huge loss of business, this method won’t work well for you. Instead, you can deal with uneven income in a different way.

For Businesses with Unpredictable Revenue, You Can Use the Annualized Income Installment Method

If your business’s income is uneven or unpredictable throughout the year, the IRS lets you use a second method to estimate your quarterly taxes: the annualized income installment method.

To use this method, you’ll have to first make your best guess on your annual income and expenses. Then, when you file your first quarterly taxes, you can adjust your best guess using your actual results from the first quarter. You’ll still have to guess your second through fourth quarter numbers. Using these numbers and Form 1040-ES, you figure out your estimated quarterly taxes for your first quarter. And don’t forget to add self-employment taxes too, if this is applicable to you.

When you file your second quarterly taxes, you’ll have income and expenses data for the first two quarters. But you’ll still have to guess your third and fourth quarter numbers. Fill out your 1040-ES and get a number for your second quarterly payment.

Repeat this for the third and fourth quarters, each time making a better guess of your annual income and expenses because you now have actual data.

At the end of the year, use Form 2221 to calculate any under or over payment of your estimated taxes. And pay the underpayment, if any. You’ll need to file Form 2221 along with your 1040 or 1120/1120-S.

How to File Your Estimated Taxes

There are several ways you can send your estimated taxes to the IRS. You can mail the payment via snail mail, send the payment online, pay by phone, and even pay by app.

The easiest way to submit your payment, though, is to pay through the Electronic Federal Tax Payment System (EFTPS). You’ll have to sign up for an account, but, afterwards, you can schedule your payment in advance. You can even choose to pay in weekly, bi-weekly, monthly, etc. installments.

Most states have some form of electronic filing too. Check your state’s Secretary of State’s website (or equivalent) to find out the exact information.

We Couldn’t Find Software to Help with Your Calculations

In this article, we outlined how you can estimate your quarterly taxes yourself. We looked for software that uses the annualized income installment method for businesses that have uneven income. But, other than QuickBooks Self-Employed, we couldn’t find any. It’s quite puzzling to us that no such software seems to exist, when most small businesses can benefit from it. We’ll keep looking. If we find it, we’ll add a mention in this article.

Interested in starting and running a small business? Here’s the beginning of our step-by-step guide: What to do right after getting that great business idea.

DISCLAIMER: This article does not constitute legal or accounting advice. Instead, it contains general information. The information gives you the background you’ll need to hit the ground running when you do go get advice from a lawyer or accountant. Only lawyers and accountants properly licensed in your state/country are qualified to give you legal or accounting advice.