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As a business owner, the IRS requests that you file quarterly estimated taxes (Form 1040-ES). As an employee, taxes are usually withheld from every paycheck, so the final April 15th burden is spread out over the year, before the money is ever enjoyed or spent. Owners do not typically have this luxury of spreading the burden out. So the IRS has tried to make it “easier” for owners to pay their taxes.

You will owe the taxes come April 15th, and if you are unable to pay them in full, you could be subject to penalties and interest. By filing (and making payment on) quarterly taxes, you can more effectively manage your cash flow in your small business.

It might seem complicated, but if your business is established and you paid taxes last year, it pretty easy to do your quarterly tax filing. You simply need to take the total taxes paid from the previous year, divide by four, and make a payment based on that. This will typically keep you out of trouble with the IRS.

Hopefully your business has grown since the previous year. If you know you will have a much higher income this year, you can always pay the IRS more than what you would have owed based on last year’s tax return. This way, you won’t be shocked with a huge bill to pay in April.

Conversely, based on the current economy, your business income may be down. You may not want to, or be able to, pay the IRS based on last year’s taxes. Some consider it a type of savings account, and know there will be a refund come tax time. However, you might need the help of an accountant to help you figure out if it’s worth it not to have access to that money now rather than later.

The IRS interest rate is currently 4%. This means if you haven’t paid up by the end of the year, you will be charged 4%. If you’re in a situation where you have a limited cash flow right at this exact moment, but expect a large receivable in the near future, you will need to consider if you want to put that payment on your credit card now (and what interest you will pay), or if you would prefer to make the big payment before the end of the year.

Quarterly estimated taxes may seem like a real headache, and it’s hard to write that check every three months. But when you consider that you don’t have weekly or biweekly taxes being withheld, it’s really not that bad. You may want to talk with your accountant and determine how much of your business income you should be setting aside to make these payments.

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Comment by John Huddleston on October 18, 2010 at 12:29pm
Note that to avoid a penalty, you can either pay 90% of your current year's tax obligation or 100% (110% if AGI > $150,000) of your previous year's tax obligation.



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