Paying quarterly taxes is a special business obligation that makes them different from an employed individual. For most companies, paying quarterly taxes is a challenge at first and quickly becomes a standard routine after a few quarters. To avoid penalties and keep your tax bill low, it is wise to work with a qualified tax professional in your state. These tips will help you get your business documents in order so you can pay quarterly taxes when they are due.
Why paying quarterly taxes matters.
If you earn income through a business, quarterly taxes matter. According to the Internal Revenue Service website:
“Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.”
If your business fails to pay your quarterly tax bill, the IRS may apply penalties to your company. For example, the IRS states: “If you do not pay your taxes by the due date, you will have to pay a penalty for each month, or part of a month, that your taxes are not paid.” Since the IRS can charge interest as well as penalties, the bill can quickly become large.
It is also possible that the IRS may choose to conduct an audit of your business, which can consume considerable time, mental stress and anxiety. The time consumed by an IRS audit takes several forms. You may have to meet with your accountant and attorney to prepare for an IRS meeting. You may lose hours of valuable time in meeting with an IRS representative to address questions. Finally, the IRS may send you a report that will require you to pay money or take additional actions. All of these steps take time away from selling, working with customers, and managing employees.
To minimize the chances of problems, we suggest working with a qualified tax professional in your jurisdiction. For tax accountants to work effectively with you, it is best to provide them with organized records.
Your step-by-step plan for paying quarterly taxes accurately.
There are a few steps to follow to get organized for your quarterly tax payments. These steps will take some additional effort the first time you do them. In the future, it will be a faster process.
Organize your business bank account system.
If you have recently started a small business, you might be used to getting by with one or two personal bank accounts. Keeping your business finances in order takes a different approach.
Business author Mike Michalowicz recommends using multiple bank accounts in his book “Profit First”. Specifically, you may wish to consider opening a tax bill bank account separate from your primary business checking account. With a separate tax bill account in place, you can set aside money to cover your tax liability every week or every quarter. By saving up, paying quarterly taxes becomes easier. Contact your bank to ask about the possibility of setting up multiple accounts.
Tip: Consider using one business credit card to pay all of your business expenses because that will make it easier to find all of your expense information in one place.
Check your tax due dates.
The due date for your quarterly tax payment follows usually follows this schedule:
- January 1 to March 31: Quarterly tax payment due on April 15
- April 1 to May 31: Quarterly tax payment due on June 15
- June 1 to August 31: Quarterly tax payment due on September 15
- September 1 to December 31: Quarterly tax payment due on January 15 of the following year
However, there have been special extensions offered in 2020 as a result of COVID-19. Please contact your tax professional or the IRS directly to confirm the due date for your next quarterly tax payment bill.
Review your revenues and expenses for the quarter.
The amount of taxes you pay generally depends on your business’s revenues and expenses for the quarter. For instance, if you run a seasonal business providing snow removal services, you might have zero revenue in the summer. As a result, your summer quarterly tax payment amount would be different than in other seasons. That is why you will want to carefully review your expenses and revenues each quarter before making a payment.
There are different ways to keep your small business accounting records organized. You might use a spreadsheet program like Google Sheets or Microsoft Excel at first. Once your business becomes more complex, using a specialized software program like QuickBooks® may be a wise choice. Bookkeeping software gives you the ability to produce reports so you can quickly see how much profit you are earning and whether or not you need to make changes to your business. Alternatively, you might decide to use tax software recommended by your accountant.
Complete the tax bill payment on time.
Paying your tax bill on schedule is a critical practice, so plan ahead. Let’s say you confirm that your next quarterly tax bill is due on January 15. To ensure you achieve that payment date, you may set a reminder on your calendar to start the planning process on December 1. After you return from the holidays, check on the tax payment preparation process on January 2 and then plan to pay the bill by January 9. This series of mini-deadlines reduces the chance of sudden surprises.
Paying quarterly taxes to the IRS is easy because there are several options available. As of 2020, payment options include paying by mail with a form and a check, paying online, by phone, or from your mobile device using the IRS2Go app. After you complete the payment, save a copy of your records’ receipt just in case there is a problem processing your payment.
Save the information for your annual tax return.
Paying a quarterly tax payment does not eliminate the need to file an annual tax return. However, paying quarterly tax payments accurately and on time means you can save time on your annual taxes. That’s why it is helpful to save a copy of your quarterly tax payments and supporting information in a file so you can get ready for your annual tax return quickly.
Complete a quarterly financial review for your business (optional).
Set some time aside each quarter to review your business revenue and expenses in depth. Consider using the following steps in your quarterly financial review.
- Review revenue and expense trends. Using a report from your accounting or accounting software, review the trends in your company’s revenue and expenses. If you see something strange, like a large sale you didn’t know about, talk to your staff to find out more about the situation.
- Investigate savings opportunities. For example, you might be spending more money on your business phone system each month. Find out how much money you can save by using the small business phone system savings calculator.
- Identify outstanding bills. Paying suppliers on time is a good way to maintain positive business relationships and avoid overdue penalties. If overdue invoices are found, make arrangements to pay those invoices and develop a solution to ensure on-time payment in the future.
- Find overdue customer payments. Some customers may fall behind in their payments. During the review, identify the largest outstanding amounts from customers and assign an employee to follow up.