Business Taxes: Annual v. Quarterly Filing for Small Businesses
Paying taxes as a small business owner is different from paying taxes as an employee. When you work for someone else, your employer withholds various taxes from your wages, and you file a tax return once a year. As a small business owner, it's up to you to pay taxes on your business income, and you need to do so every quarter.
Here's what you need to know about filing taxes quarterly and annually as a small business owner.
When you file your annual tax return, compare the tax due with your quarterly estimated payments. If you overpaid, you can request a refund.
What are quarterly taxes?
The IRS requires most small business owners to make quarterly estimated payments if they expect to owe tax of $1,000 or more.1 Estimated payments include two types of taxes: income taxes and self-employment taxes.
- Income taxes: This is the tax you pay on all income, including wages, investment returns, and net profit from a business.
- Self-employment (SE) taxes: SE taxes are the self-employed version of Social Security and Medicare (FICA) taxes that are withheld from an employee's paycheck. It includes both the typical "employee" withholding as well as the matching amount an employer normally pays as well.
Corporate officers may or may not have to pay quarterly estimates. If the officer performs a service for the company, they are considered employees of the business and have income and FICA taxes withheld from their paychecks. However, if the officer receives dividends from the company in addition to their salary, they may need to make quarterly estimates to cover the income taxes on those dividends.
How much are quarterly tax payments?
Figuring out how much you need to pay each quarter is tough, especially if this is your first year in business. The amount you need to pay for federal income taxes depends on your tax bracket and other deductions and credits for which you qualify. SE taxes are a little more cut and dry. Currently, SE taxes are generally 15.3% of the first 92.35% of your net earnings.2
That 15.3% includes 12.4% for Social Security and 2.9% for Medicare. There is a cap on the amount of net income on which you need to pay the Social Security portion of self-employment taxes. That net income is $142,800 for 2021 and $147,000 for 2022.3 There is no cap on the Medicare portion of self-employment tax..
IRS Form 1040-ES4 includes an estimated tax worksheet that can help you calculate your estimated tax for the year and break it down into four quarterly tax payments.
Those quarterly estimates are generally due on April 15, June 15, September 15, and January 15 of the following year. If any of those dates fall on a weekend or holiday, the deadline shifts to the next business day.
How are annual taxes different than quarterly taxes?
Even though you're paying estimated taxes quarterly, you still need to file an annual federal income tax return. When you file your annual tax return, you calculate your actual tax liability for the year and compare it to the estimates you paid in your quarterly tax payments. If you didn't pay enough, you'll owe additional tax. If you paid too much, you can get a refund when you file your annual return.
The exact forms you need to fill out for your business depend on your business structure.
- Sole proprietorships and single-member LLCs (those with only one owner) report business income and expenses on Schedule C5 and include it with their personal tax return, Form 1040.6 Form 1040 is due on April 15.
- Partnerships and multi-member LLCs (those with more than one owner) report net profits from the business on Form 1065.7 Form 1065 is due on March 15.
- S corporations file Form 1120-S8, which is also due on March 15.
How to plan for taxes year-round
Paying taxes four or five times a year instead of once might seem onerous, but there are things you can do to make regular filing a breeze.
- Open a business checking account. If you haven't already, open a separate checking account that you'll use solely for business. This makes it easier to track your business income and expenses.
- Set aside money for taxes. Start setting aside a portion of your income each month for estimated payments. It's helpful to have a designated account for tax savings, so you aren't tempted to use the funds for another reason.
- Pay online. Form 1040-ES includes vouchers for mailing estimated payments, but you can save the hassle of sending a check (and the possibility of having your check lost in the mail) by paying online using IRS Direct Pay.9 There's no fee for making your payment online, and you'll get a confirmation number immediately.
If you need help with annual or quarterly taxes, be sure to talk to a tax professional. Tax planning is an ongoing process, especially if you're self-employed, and a tax pro can help you make accurate estimated payments and file your annual return.
Important Disclosure Information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
- IRS.gov, "Estimated Taxes," updated November 25, 2020. Accessed November 27, 2020. Back
- IRS.gov, "Topic No. 554 Self Employment Tax," updated October 22, 2020, accessed November 27, 2020. Back
- Social Security Administration, "Contribution and Benefit Base," accessed December 14, 2020. Back
- IRS.gov, "Form 1040-ES," accessed November 27, 2020. Back
- IRS.gov, "Schedule C, Profit or Loss from Business," accessed November 27, 2020. Back
- IRS.gov, “Form 1040, U.S. Individual Income Tax Return," accessed February 17, 2020. Back
- IRS.gov, "Form 1065, U.S. Return of Partnership Income," accessed February 17, 2020. Back
- IRS.gov, "Form 1120-S, U.S. Income Tax Return for an S Corporation," accessed November 27, 2020. Back
- IRS.gov, "Direct Pay With Bank Account," updated November 25, 2020. Accessed November 27, 2020. Back
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