Does my business have to pay quarterly taxes?

If you just started your business, perhaps you think of “tax time” as an annual event in April. But alas, the U.S. government expects you to pay taxes as you earn—in four quarterly-ish payments. 

Not only do many new small business owners not know this, but the payment schedule and calculation are fairly complicated (more details below). Yes, it’s all very confusing. But we wrote this guide to make it simple—with visuals. It takes just nine minutes to read.

Do not skip these quarterly payments. If you do, you may face stiff fines. And anyway, if you pay your taxes quarterly, then you aren’t hit with a huge tax bill in April. If you did it right, when you file your taxes, you owe nothing—which makes it easier to plan.

What is a quarterly estimated tax?

It’s a quarterly advance you have to pay toward your income and employment taxes, to both the federal government and each state you’re doing business in. If you run a C-Corp, this means paying 25% of those federal income taxes on each of the four dates, and whatever amount each state sets. If you run an LLC or LLP, this probably means paying personal income taxes plus self-employment taxes. (Read about all the taxes you have to pay.)

What C-Corps pay:

• Corporate income tax
• Payroll taxes for W-2 employees (employer)

What S-Corps, LLCs, and LLPs pay:

• Payroll taxes for W-2 employees (employer)

What owners of S-Corps pay:

• Personal income tax on W-2 earnings and distributions
• Payroll taxes on W-2 earnings (employee)

What owners of LLCs and LLPs pay:

• Personal income tax
• Self-employment tax

Exception: LLCs/LLPs that elect S-Corp or C-Corp taxation follow those rules instead.

That’s the short version. Next, we go into detail.

Who has to pay quarterly taxes? 

Anyone who’s in business for themselves and is profitable for the year. If you earn $400 or more in income from a customer in a situation where you have no direct employer, you’re considered to be doing business for yourself.

Here are some tell-tale signs that you must pay your taxes quarterly:

• You pay self-employment taxes—If that’s the case, you’re in business for yourself. The same is true if you have been told you have to file a Schedule SE on your personal income tax return (Form 1040 or Form 1040-SR).
• You are an independent contractor—Who’s earned more than $400 in self-employment income.
• You are a sole proprietor, partner, or S-Corporation shareholder—Who expects to owe $1,000 or more when your return is filed. 
• You run a corporation—And expect to owe tax of $500 or more when that return is filed.

But wait—if you’re a W-2 employee, are you exempt? 

Unfortunately not. If you have a full-time job and a side hustle, you still pay estimated taxes for the side hustle income. Now, there is an exception: If you are a W-2 employee of your own business, and regularly withhold federal and state income taxes from your earnings, you can consider those part of your quarterly withholding. 

If this is you, good bookkeeping is essential. You have to keep close track of where your income is coming from. Otherwise, it will be a mess to calculate. 

When do you have to pay those estimated taxes?

It’s a bit frustrating, but the federal government’s “quarterly” payment schedule isn’t every three months. The second quarter is just two months long, and the fourth is four months long. Nobody knows why. This creates cash flow issues for some businesses, as they have to pay 25% of their annual taxes based on just two months of sales, on June’s date.

Whereas states have their own calendars. California, for example, is quarterly. But instead of paying 25%, you pay variable amounts each quarter.

Look up your own state for the rules there.

What happens if you don’t pay your quarterly payments? Penalties and interest add up

While you don’t have to pay quarterly estimated payments if you don’t owe more than the threshold in tax ($1,000 for individuals; $500 for corporations), if your income is unexpectedly higher at year-end, you expose yourself to fines. 

The fines can be quite serious: As an example, a freelance designer living in NYC who owes $20,000 in taxes at the end of the year but did not make any estimated payments would probably be fined $2,300 in federal and state interest and penalties.

That said, underpayment penalties are often waived automatically if certain rules are met (called “safe-harbor”):

• Your return says you owe less than $1k.
• You paid 90% of the actual tax due for the year (meaning, you were only 10% short, which is a forgivable miscalculation).
• You paid 100% of the prior year, even if this year you owed much more—the assumption is that you paid what was expected in good faith.

How much is your quarterly estimated payment? (How to calculate)

Take your expected federal tax liability, divide it by four. That’s the simplest method. If your revenue is changing quickly, you’ll want a tax accountant to help with this quarterly calculation and tell you how much to pay each period. 

To calculate the estimated tax yourself, use Form 1040-ES for personal income tax estimates. Nonresident aliens can use Form 1040-ES(NR).  

For C-Corporations, use 1120-W). It is essential you have clean books and someone categorizing all your transactions monthly. Otherwise, you’ll have to do that before you can run the calculation.