Self-employed people must file quarterly taxes, a process that can be fraught with anguish for many entrepreneurs.
The biggest challenge with filing quarterly taxes is determining how much money to send the IRS. Because these are estimated quarterly tax filings, it is not an exact science. Pay too little, however, and you might find yourself in a bind with the IRS.
Who Must Pay Estimated Quarterly Taxes?
According to the IRS, all self-employed individuals must file quarterly returns. In reality, however, not all self-employed people are viewed equally in the eyes of the IRS.
- If your business is organized as a C corporation and your company will owe $500 or more in annual income tax, you must file quarterly.
- If your business is an S corporation, a partnership, a sole proprietor or if you are working as an individual, you must file quarterly if you will owe more than $1,000 in annual income taxes.
Otherwise, you can probably file annually. However, to be safe, confirm that with your tax attorney.
How Much Should You Pay in Quarterly Taxes?
You can go about this calculation in a couple of ways.
Many tax attorneys recommend basing each quarterly calculation on the prior year’s data from the same quarter. However, few small businesses and self-employed people have consistent income.
You could try to estimate what your income will be. You could base your calculation on the previous quarter, assuming you don’t have seasonal adjustments in volume. Or you can take the single best month you’ve had in the past year and base your calculations on that.
Dealing with Underpayment Penalties for Quarterly Taxes
If you overestimate your payment amount, you’re making an interest-free loan to the IRS. However, if you underestimate your payment, you could get hit with a substantial underpayment penalty.
Using the IRS Safe Harbor rule, you can pay the same amount you paid the previous year, and even if you owe more, you typically will not be subject to penalties. If your business made more than $115,000 last year, the Safe Harbor rule requires that you pay 110 percent of your prior year’s tax debt.
An easier, safer approach (and one that is favored by many self-employed people and entrepreneurs) is to let your tax attorney handle your quarterly tax filings. If you’re concerned about the cost of paying a tax lawyer, consider this: The time you spend working on this unpleasant task is time you’re taking away from growing your business.
Think about what an hour of your time is worth and how many hours you spend preparing quarterly taxes. Consider the deductions you may be missing and how much you will spend for penalties and interest if your calculations are incorrect.
For most clients, the modest cost of using a tax lawyer to calculate and file your quarterly taxes is negligible in comparison.
The Froisland Law Firm provides professional tax planning and related services to individuals and small business clients in Salt Lake City and the surrounding communities. Contact me today for assistance with quarterly tax filing.