Year-Round Tax Essentials for Small Business Owners

Managing your small business finances can be a hassle, but Outright.com makes it easier. They offer a convenient way to keep track of your income and expenses online, giving you a clear view of your business’s financial health every day and simplifying tax time.

When did you last think about taxes? If you’re like most people, it’s probably in April. But for small business owners, taxes are a year-round concern thanks to quarterly estimated taxes (QETs).

QETs often cause confusion and are sometimes ignored, which can hurt your business. Even though they can be annoying, dealing with them is necessary. Let’s break down what QETs are and what you need to do to manage them.

In the U.S., income tax works on a “pay-as-you-go” system, meaning you pay taxes throughout the year. If you have a regular job where you fill out a W-2 form, taxes are automatically deducted from each paycheck. All you need to do is fill out some forms when you start your job to set this up.

For small business owners, it’s different. You get paid directly for your work, and it’s up to you to send a portion of that payment to the IRS. That’s where QETs come in. Every few months, you need to report your income and pay a portion of it to the government, which is the price of working for yourself.

Although it might seem complicated, filing your QETs is similar to filing your federal taxes in April. If you have a good system for keeping track of your receipts, bills, and invoices, you’re already halfway there. Keeping these records is crucial because paying too little in taxes can result in penalties, while paying too much means you’re essentially giving an interest-free loan to the government until you get a refund in April.

To get started, grab a 1040ES form, which is specifically for independent contractors. On this form, you’ll need to fill in your income and any business expenses. The deadlines for filing are generally:
– Q1: Mid-April
– Q2: Mid-June
– Q3: Mid-September
– Q4: Mid-January

Send your completed form to the nearest IRS office, or use the IRS’s online payment system for convenience. This online system lets you set up automatic payments, so you just need to keep your information updated.

An easier way to handle QETs is to base them on last year’s tax return. Find the total amount you paid in taxes last year and aim to pay at least 90% of that in quarterly installments this year. While this method helps you avoid IRS penalties, you could still owe more if your earnings increase significantly this year. It’s better to estimate your total annual taxes and divide that amount into four payments.

If you have more questions, check out additional resources or consult a financial professional for advice.