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You’ve jumped through what seems like countless hoops to get your business going. You’ve filled out every form and talked to all the right people. You did all the research and learned from others’ past mistakes. Now it’s just a matter of getting it all done.
Of course this is easier said than done. There are a million things you have to do as a business owner you never dreamed about as a salary or wage worker. Aside from your usual business matters you must now attend to you have to worry about dealing with taxes.
Not just your usual taxes, either. Quarterly estimated taxes, or QETs, are about to become a huge part of your life. If you don’t know what they are or how they work, though, you could be in for a world of hurt. Let’s take a look and get you familiar with them.
What are Quarterly Estimated Taxes?
Back in your days of working for “the man” you probably didn’t have an intimate relationship with the tax man. Sure, there was the yearly scramble in April and you noticed that some money was taken out of your paycheck, but that was about it. You didn’t have to calculate anything every pay period or constantly send money in yourself.
Now, though, things are different. Taxes were taken out of your check because the U.S. is a “pay as you go” tax system. Now, though, you’re the one responsible for paying your taxes as you go. Fortunately, you don’t have to send in tax payments every time you receive payment on an invoice, but you do have to pay these “quarterly estimated taxes.”
In a nutshell, you need to figure out how much in income taxes you will owe at the end of the year and send in four quarterly payments totaling that amount. These payments are sent in for Quarters 1-4 in April, June, September and January.
Of course, you won’t know after Q1 just exactly how much income you’re going to make. After all, you could have an unforeseeably prosperous Q4 and end up owing more in taxes than you expected come next April. Fortunately, the IRS understands this, which is why these payments are “estimated.” A good rule of thumb is to pay as much in estimated taxes as you paid last year. You can find this number on your 1040 form. So if you owed the IRS $4,000 last year, make each quarterly estimated tax payment $1,000. Paying as much as you owed in the previous year will also mean you’re off the hook for fines and penalties.
Why Quarterly Estimated Taxes are Your Friend
Believe it or not, QETs can actually help your business. It can be a little annoying at first to constantly be worrying about these payments, but there are several payoffs that can improve your company in the long run.
The first reason is organization. One of the first things you should do before starting the process of figuring out your first payment is getting your paperwork in order. We recommend grabbing an account at Outright, which can automatically track all your invoices and payments and everything else financial. This way you don’t have to constantly keep up with physical paperwork.
This organization can benefit your business in a huge way. So much of your time will be eaten up by tasks like QETs that a proper system can make a huge difference in your production schedule.
On top of that, handling QET payments can give you a lot of experience when it comes to April taxes. The more you do them and the more you keep up with them the better you get. When yearly taxes come around it will seem like nothing to you! Not to mention you aren’t facing a steep tax bill all at once.
As far as payments to the IRS go, we recommend using the EFTPS. It’s an electronic payment method the government set up and is super fast and easy. Unless you’re lucky enough to live in a state without income tax, you’ll likely owe quarterly estimated taxes to your state government, too. Check out your state’s taxing authority for more information on those.