How to Pay Estimated Taxes Online
As a small business owner, paying taxes is inevitable. As easy as it may be to pretend taxes don’t exist for a year, the mad rush and high dollar demand of an annual, lump sum payment just doesn’t make sense for entrepreneurs.
Working on tight margins, managing your own finances and then trying to navigate taxes after not thinking about it for twelve months is usually hurting, not helping. That’s why quarterly estimated tax payments make the most sense for a small business.
You get to be regularly engaged with this huge financial piece of your business. You get more control and insight into your taxable income. And you have the opportunity to plan and prepare in each season rather than just riding out a whole year hoping it all works out in April. For most small businesses, paying their quarterly estimated taxes online is the most efficient and easy way to get the job done.
The Estimation
As the name would imply, your quarterly estimated tax payment is just that: an estimation of the taxes you think you’ll owe on the quarter’s worth of net income or profit.
But how do you estimate how much to pay in taxes each quarter?
For keeping it really simple, many just take 25-30% of their profit (net income) and put that towards taxes. Generally speaking, that’s the amount it comes out to for most small businesses.
If you like a little bit more precision, there are free online calculators that can help you work through the numbers more easily. These tools provide a little guidance if you’ve never filed taxes as a business owner before.
One of the best factors that can be used to determine estimated tax payments is your historical financial data. The more years you’ve been in business the easier it should be to see the pattern of your earnings and make a simple calculation from there.
A professional CPA will also be able to help you estimate a number with a more exacting calculation. They’ll take your business’s financial records and industry standards into account to help you get near an accurate quarterly number.
Keep in mind that this is always just an estimate. You could end up over or under which we’ll talk about soon.
How to Pay Online
Luckily, in today’s modern world you can pay your quarterly tax payment as easy as any other bill. The Electronic Federal Tax Payment System functions as the “online payment” portal for the IRS. There is also a paper form option if you prefer, but for most small business owners the pay online option is the best, most efficient way to get the job done.
Quarterly payment due dates change slightly each year and don’t quite line up perfectly with the quarters (for example a payment is due in June which is still within Quarter 2 instead of at the end of it). The best way to see the due dates is by Googling the “1040-ES” form for the current year. There are instructions at the top that include the due dates.
It’s also important to note any changes or global impacts on the tax season and to understand how that affects your business. In 2021, for example, tax filings for individuals were pushed to May as the result of the impact from the 2020 pandemic. That being said, the quarterly payment for small business owners didn’t change. It’s incredibly important to make sure you’re plugged into any changes that could occur.
What if I underpay?
A common concern amongst new business owners is with regards to underpayment. What happens if you don’t pay enough in your estimated quarterly taxes? Well, not unlike withholding as an employee, if the end of the year comes and you haven’t paid enough in taxes, you will owe the IRS for the difference.
For example, if you have had a consistent trajectory by which you’ve made payments, but your last quarter takes an unexpected leap in sales and you didn’t adjust your quarterly, you may owe more as a result.
What if I overpay?
On the other hand, if you overpay, you will be owed money from the IRS in the form of a tax refund. Like tax refunds for traditionally employed people, you’re free to do with that money as you choose. You can cash the check, of course, but you can also leave it in your account to help cover future tax payments. Do your best to estimate accurately, however, as the IRS can penalize you for either overpayment or underpayment of your estimated taxes.
Can I change my quarterly estimated tax payment amount?
If your business has suddenly experienced changes that you know will drastically impact your tax payment, it is possible to change the quarterly amount you’re paying in order to adapt to that change.
For example, if you gain a big client that has doubled your income, you know your estimated quarterly tax will need to be increased as well. On the contrary, if you’ve closed a business location, you may need to drop your quarterly amount to accommodate for a loss in sales.
These ebbs and flows are another area where a CPA may be able to provide beneficial and proactive insight to keep your cash flow in a good place and the demands of tax paying in check.
As a general rule, if you’re going to owe over $1,000 in taxes for the year, quarterly payments are going to be a regular endeavor in your business. You might as well make the process as seamless as possible by getting your estimate as close to accurate as possible, paying online, and being nimble in times of change.