Most entrepreneurs have encountered the topic of quarterly taxes, but it’s one that can cause A LOT of confusion.
I want you to know what these taxes are, how to calculate them, and how to pay them quicker than drinking your morning coffee.
Quarterly taxes are based on profits
Remember way back when you were an employee? You would get a paycheck and your taxes had already been deducted. The amount you got to keep was your net pay.
Unfortunately as an entrepreneur, taxes don’t work like that. The profit you make is kind of like your gross pay, and you have to deduct the taxes from it yourself.
Because the IRS is no longer getting those taxes from your employer every 2 weeks, they want you to calculate and pay your taxes quarterly. Not every single time you get paid, like when you were an employee – every quarter.
But how do I know how much I owe taxes on?
Great question! When you’re getting on top of calculating taxes, it’s essential to know your numbers. In fact, this YouTube video should help a lot.
Your quarterly taxes are based on the profit your business makes. Make sure you download a copy of my free Profit Plan tool which will help you crunch those numbers. We want to think of our profit as our gross pay, and that’s the amount we owe quarterly taxes on.
Estimated Quarterly Taxes
Have you ever done your taxes at the end of the year and found you owe $1000s? This is a mistake I see entrepreneurs make a lot.
“Wait up, I paid my estimates all year. My accountant told me what I needed to pay, and I paid it every quarter!” – Sound familiar?
Here’s the thing – your quarterly tax estimates are actually based on last year’s profits. If you made $10000 profit in 2020, your accountant will tell you to make quarterly payments based on that amount. But guess what? If you had a GREAT 2021 and made $20000, your estimated taxes weren’t based on the correct amount – meaning you’re going to owe the difference.
Now, no need to panic – as long as you’ve made payments based on last year’s profits, you’ve paid the minimum. No penalties from Uncle Sam for you!
You have to pay the extra tax owed, sure. It just comes without a side order of fines (so make sure you’re paying the minimum at least!)
Be Prepared and Be Aware
There’s three potential scenarios that can come up when paying estimated quarterly taxes:
- You make the exact same profit as last year, in which case, great! Nothing to worry about
- You make more profit than last year. This is where you get that tax bill at the end of the year
- You make less profit than last year. Hopefully you won’t find yourself in this situation, but if you do then you’ve paid too much tax
I encourage my clients to calculate their tax liability every quarter so they know how much to pay. It’s not an estimate, it’s based on their actual profits.
This means they avoid getting slapped with a fine or a heavy tax bill at the end of the year.
If you’re just looking to avoid penalties and don’t mind an unexpected bill, paying your estimates is fine. But if you want to know exactly how much you owe, download my Profit Plan tool and let’s get started!
Calculating your actual quarterly taxes
Ok so, disclaimer, they might not be exact to the penny, but they’re a lot more accurate than using your estimates. These figures are the general rule of thumb I like to use, but to calculate exact percentages, speak to your tax preparer.
You need to calculate your profit each and every month (using my Profit Plan tool to help) and then set aside:
- 25% for Federal Taxes
- 5% for State Income Taxes (if you live in a state that doesn’t have this, then don’t worry about this figure)
A lot easier than you thought, right?
Quarterly Tax Due Dates
It makes sense that your quarterly taxes are due each quarter – right? Unfortunately, a lot of entrepreneurs fall into this trap because the IRS likes to play with us!
The payment and due dates you need to be aware of are listed below.
- Quarter 1: Jan 1 – March 31 (due April 15)
- Quarter 2: April 1 – May 31 (due June 15)
- Quarter 3: June 1 – August 31 (due September 15)
- Quarter 4: September 1 – December 31 (due January 15 of the following year)
Bear in mind that these dates all depend on what day of the week the due date lands, so make sure to check them at the start of each year and mark them in your calendar.
Notice something weird though? Quarter 2 is only 2 months long. That’s not an error – the second quarter isn’t a quarter at all.
This has thrown so many entrepreneurs in the past, which is why it’s important to mark the dates in your calendars!
How to pay your Quarterly Taxes
We’ve talked about how to calculate your taxes and when they payments are due. But how do you actually pay them in a few clicks of a button?
The idea of filing and paying taxes can sound so overwhelming. I promise you, it is actually really simple.
To make your state payment, go to your state’s division of revenue website and you should be able to find the information on how to make estimated payments.
The steps to paying your Federal taxes – the IRS amount – are as follows:
- Go to https://www.irs.gov/payments and log in
- Click on ‘Make Payments’ and click the blue box
- Select ‘Estimated Tax’ as your reason for payment
- Select the relevant tax payment period
- Fill out your banking information, payment amount and electronically sign
- Hit ‘submit’ and you’re done!
I have a dedicated module to paying the IRS in my Profit Perfect course where I go into more detail, but these are the quick steps to follow.
Quick tip: When these tax payments come out, make sure you are labelling them as a personal draw and NOT a business expense!
I hope the information I’ve shared here has helped you to understand how to calculate and pay your quarterly taxes. Download my free Profit Plan tool to keep on top of your numbers, and here’s the YouTube vid to watch me walk through tax payments!
Taxes are part of the housekeeping that comes with being an entrepreneur. It may not be sexy or fun, but it is a legal requirement. I promise, it’s not as hard as it looks.
Let’s Get This Done!
Check out my website to learn more!