Quarterly Taxes

As a small business owner, you may be required to file quarterly estimated taxes if your tax liability exceeds a certain threshold and you don’t have sufficient withholding from another source (such as a W-2 job) to offset that liability.

Let’s talk about how to know whether you owe quarterly taxes and how to estimate them.

Are you required to file? #

The IRS has a two-part test to know whether you need to pay quarterly taxes:

1. If you expect to owe taxes of at least $1,000 on your tax return (i.e., total tax minus withholding is still greater than $1,000), and
2. You don’t have enough withholding from other sources (such as a W-2 job) to cover the smaller of
   1. 90% of the tax on your current-year return, or
   2. 100% of the tax on your prior-year return

In other words, you must pay estimated taxes if you expect to owe at least $1,000 and you don’t have sufficient withholding to cover your tax liability.

What if my day job employer withholds taxes already? #

If you or your spouse don’t have other W-2 jobs that withhold taxes and you expect your small business to be profitable, you will most likely need to pay quarterly estimated taxes.

However, if you have a W-2 job that withholds taxes, it will depend on how much withholding you have. You can avoid having to pay quarterly taxes if you increase your employer’s withholding by giving them an updated W-4.

Here are two hypothetical examples to illustrate the effect of withholding on quarterly tax payments:

Example 1: Sufficient withholding #

No quarterly taxes due in this situation:

• Your W-2 job withholds $5,000 of tax
• Your tax burden for the year will be $4,000
• Your tax burden from last year was $3,100

Let’s apply the two-part test:

1. ❌ Your tax burden is only $4,000, which is less than the $5,000 you’ve already withheld. So you would not owe any taxes and you would get a refund of $1,000.
2. ❌ You already have sufficient withholding compared with this year and last year
   1. $5,000 withheld > $3,600 (90% of $4,000) for this year
   2. $5,000 withheld > $3,100 (100% of $3,100) for last year

Example 2: Insufficient withholding #

You will need to remit quarterly taxes in this situation:

• Your W-2 job withholds $3,000 of tax
• Your tax burden for the year will be $4,000
• Your tax burden from last year was $3,100

Now for the two-part test:

1. ✅ Your tax burden for the year is $4,000 but you have only withheld $3,000, so you would owe tax of $1,000
2. ✅ You did not have sufficient withholding compared with this year or last year
   1. $3,000 withheld < $3,600 (90% of $4,000) for this year
   2. $3,000 withheld < $3,100 (100% of $3,100) for last year

When are quarterly taxes due? #

Estimated taxes are generally paid in four equal installments throughout the year.

These are the upcoming quarterly tax due dates:

(Source: Internal Revenue Service)

How do you calculate quarterly taxes? #

The IRS publishes a full worksheet for calculating your quarterly taxes attached to form 1040-ES. To get your exact numbers, you’ll want to follow that worksheet or consult a tax professional like Daybreak Tax.

Your estimated tax is the total amount you expect to owe for the year: tax burden minus deductions, credits, and withholding. Then, divide this amount equally into four installments to calculate your quarterly estimated tax payments.