If you’re self-employed and running an S Corp, there’s a lot to keep track of regarding personal and business taxes. From tax forms like Form 1120S and Schedule K-1s to payroll taxes and more, tax filings can be tricky for S Corp owners.
While you’ll pay income tax through regular salary withholdings, you may also have to make quarterly estimated tax payments. But what’s the purpose of these payments, and how are they calculated? How do you pay them, and what happens if you don’t? We break down everything S Corp owners should know to properly calculate and submit quarterly taxes and avoid penalties.
What are quarterly taxes?
Quarterly taxes, officially called “estimated taxes” by the IRS, are the quarterly prepayments of your tax bill. Generally, when you get a paycheck, you’ll see the gross amount you’ve earned, then see adjustments for things like insurance premiums, retirement contributions, union dues and state and federal tax withholding. Your employer withholds a portion of your paycheck and sends it to the government to cover your income taxes.
For most people, this is sufficient to cover the taxes that they’ll owe. But, if you have income outside your regular paycheck that isn’t subject to withholding, like your pass-through business profit or investment income, you must pay federal income tax on that income through quarterly estimated tax payments.
Who has to pay quarterly taxes?
Not everyone has to pay estimated taxes, but they are important for those who are self-employed, freelancers or have a side gig that doesn’t withhold taxes.
If you have self-employed income or other income sources that aren’t subject to withholding, you’ll probably need to pay estimated taxes. For an S Corp owner specifically, estimated taxes cover the tax due on the remaining business profit or the portion of your business income that isn’t your salary.
The IRS guidance says that you must pay estimated taxes if you’re a shareholder in an S Corp, a sole proprietor or part of a partnership and will owe $1,000 or more come tax time.
Steps to calculate and pay quarterly taxes
Calculating quarterly taxes
If you think you might have to pay quarterly taxes, it’s essential to do the math and pay the proper amount. If you wind up owing $1,000 or more when you file your income tax return, you may face penalties from the IRS.
Here’s how to calculate your quarterly taxes:
- Estimate your taxable income
- Determine your tax liability. You can calculate this by multiplying your taxable income by your tax rate
- Add up the payments you’ve already made this year
- Subtract the payments you’ve already made from your estimated tax liability
Quarterly taxes are the pre-payment of the shareholders’ tax liability. However, some states impose business-level S Corp tax. Be sure to consider your state’s S Corp tax obligations, as you may also have quarterly taxes due at the business level.
Submitting quarterly taxes
If you must make quarterly payments, you must pay by the 15th day of April, June, September and January. If the 15th is a holiday or weekend, the tax due date is the next business day.
To make quarterly tax payments, you can send a check by mail along with IRS Form 1040-ES. Mailing payments through snail-mail is an acceptable method to submit payments, however be aware of the risk of mail and check fraud and potential delays through the mail system.
As a faster and safer alternative, you can submit payments from a bank account on the IRS website or use a credit card to pay via IRS Direct Pay, though a fee may apply if you choose to use a card. You can also opt for the Electronic Federal Tax Payment System (EFTPS) from the U.S. Department of the Treasury. This system allows you to submit any taxes you owe the IRS.
If you live in a state that levies income taxes, be sure to check your state’s Department of Revenue website to determine how and when to pay your state taxes.
Pro tip: When you pay taxes each quarter, keep receipts and payment confirmation notices so you can include that information on your personal tax return at year-end.
Potential penalties and how to avoid them
The IRS requires certain taxpayers to make quarterly tax payments throughout the year as they earn their income. This ensures that the IRS collects tax payments during the year, similar to withholdings, rather than receiving a lump sum payment at the end of the year. You may incur penalties and interest on certain balances owed when you file your tax return.
A penalty will apply if:
- You owe more than $1,000 AND
- You paid less than 90% of the amount of tax you owed or less than the full amount of tax you owed in the previous tax year.
Typically, the penalty is equal to 5% of the underpayment amount, though it can reach as high as 25%. The IRS also charges interest on underpayments based on market interest rates.
Calculating your estimated tax bill correctly and submitting quarterly payments is the best way to avoid an underpayment penalty. While it can be difficult to pinpoint your exact year-end income, keeping clean financial records and re-assessing your income quarterly can help you calculate a more accurate estimate.
If you’ve paid at least 90% of your annual taxes or at least your prior year’s tax balance, the IRS won’t assess a penalty. That said, this still requires a reasonable estimation of your annual income.
Strategies for effective management of quarterly taxes
Managing your quarterly taxes can be difficult, but it’s essential to keep it on your radar and seek professional guidance as needed.
Keep clean records
Tax filers need to maintain accurate and complete financial records to estimate their annual income. Effective bookkeeping will help you extrapolate data based on previous years’ earnings and growth trends, then help you project numbers for your estimated tax payments
Capture deductions
You can deduct business expenses from your income, which reduces your tax bill and provides tax benefits.
Budget for tax payments
You should also budget for your quarterly tax payments. You know when they are due each year, so you don’t want to treat them like surprise bills each time they come up. Set some money aside each month to make your next quarterly tax payment.
Modify withholdings
Alternately, you can adjust the withholding on your paychecks to withhold a larger amount of money for income taxes. If you withhold enough, you can use this as a substitute for paying quarterly taxes. The IRS even encourages this strategy, recommending adding extra withholding on your W-4.
Get professional help
Beyond this, you can use a CPA or service to help you with your quarterly tax payments and ensure you file forms appropriate for your situation. For example, Collective sends members tax estimates each quarter to ensure they comply with IRS requirements.
Summary
Quarterly tax payments can be tricky to figure out, but they’re something business owners and shareholders must pay. Use IRS form 1040-ES to calculate your tax bill, and remember to make quarterly payments to avoid penalties at the end of the year.
