Most businesses will have to pay federal quarterly taxes, but how they pay them will vary depending on the business structure they utilize, how long they’ve been operational, and how much they believe they’ll profit each year.
Here’s what small business owners need to know about quarterly taxes and how Mosey can help them stay on track with corporate compliance.
How To Determine the Filing Requirements for Your Business
Small business owners choose their business structure based on which tax advantages will be most helpful. Each business structure has different tax requirements; some are very thorough, while others are informal and function like personal taxes.
Sole Proprietorship Tax Requirements
A sole proprietorship is seen as an individual for tax purposes. It is a business owned and operated exclusively by one person or a married couple who file their taxes jointly.
Most self-employed individuals simply report their earnings as self-employment income. Quarterly taxes are paid on all taxable income earned as individual income taxes at an individual tax rate.
Partnership Tax Requirements
A limited liability partnership (LLP) is treated as a pass-through entity. It’s similar to a sole proprietorship but modified for two or more people. A partnership is required to report its combined income and expenses, but partners pay taxes proportionally from their share of the earnings. The business doesn’t pay taxes as a separate entity.
Limited Liability Corporation (LLC) Tax Requirements
A limited liability corporation (LLC) is also treated as a pass-through entity. A limited liability corporation is similar to a sole proprietorship, but the LLC structure provides a protective barrier between the owner of the LLC and its business dealings.
LLCs can have more than one owner. Single-owner LLCs are treated as sole proprietorships for tax purposes. Multi-owner LLCs are treated as partnerships for tax purposes.
S Corporation Tax Requirements
An S corporation, commonly called an S corp, is a hybrid between an individual corporation and a separate tax entity. Although S corporations must file federal tax returns, they are treated as pass-through entities for income. Owners of an S corp pay individual tax based on the annual income they earn through the corporation.
C Corporation Tax Requirements
A C Corporation, also called a C corp, is a completely different entity from its members. A C corporation files taxes as a business, and owners only pay income taxes on their earned dividends through the C corp.
The corporation files for itself as a collective, and individuals are held to different tax standards.
A C corp will pay quarterly taxes and file an annual tax return at the end of the tax year as though it were its own person.
The differences in tax treatment are the most important reason to consider your business structure carefully. Choosing a specific corporate structure may be advantageous, especially if you require a safe harbor.
What Types of Businesses Must Pay Quarterly Taxes?
Any business that expects to owe more than $500 in yearly taxes must make quarterly estimated tax payments. This rule applies to the majority of businesses. Some sole proprietorships that are more like paid hobbies than jobs (like small-scale craft sales) may not need to make quarterly tax payments if their profit after expenses is low.
How Are Quarterly Taxes Calculated?
State and federal rules combine to create percentage calculations for quarterly taxes. Most businesses use data from the prior year to determine what they should expect to pay each quarter. Most taxes are percentage-based, and the types of taxes you’re responsible for paying depend on the types that apply to your business.
Sole proprietorships and businesses taxed as sole proprietorships will pay taxes at an individual rate. Corporations, meanwhile, are paying taxes at a flat rate. There are also local taxes that businesses are responsible for collecting and remitting. These payments must also be paid quarterly to the office responsible for collecting them.
What If It’s My First Year Paying Small Business Taxes?
If it’s your first year in business, you don’t have data from last year for your calculations. You’re starting fresh, and it may be wise to estimate generously. Calculate your state’s requirements for tax payments, and you’ll see the tax percentages you’re required to pay. These percentages don’t account for your deductions, which will reduce your tax liability.
At the end of the month, place the appropriate percentage of tax you’re expected to pay into a tax savings account. Remit your payments at the end of each quarter. You may find that you’ve overpaid at the end of the year, in which case you’ll be issued refunds or tax credits. You may find that you owe taxes if your business surpasses expectations.
Alternatively, you can work with an accountant who helps first-time business owners establish their tax practices. Your accountant will be able to provide detailed advice that reflects state tax compliance rules and projections for businesses similar to yours.
With their help — or Mosey’s compliance management platform — you’ll weather the current year and gain confidence that your data is accurate and can be used for previous-year calculations the following year.
What Types of Taxes Do Businesses Pay Quarterly?
The types of taxes you’ll pay in quarterly installments depend on your business structure. Some tax responsibilities won’t apply to a sole proprietor, freelancer, or independent contractor. For more specific information, speak with your tax preparer.
Federal, State, and Local Income Tax
Every business needs to pay federal income taxes. Some business owners will need to pay state income taxes if applicable. If you live in an area with local income tax, like Oregon’s transit tax or its municipal school district tax, this tax is separate from state income tax and must be paid individually.
Your city or county should have more information about local taxes that apply to you.
Sales and Use Tax
If your business sells taxable goods or services, you may be required to collect and remit sales tax. You’ll need a permit from your state to do so. Businesses that don’t sell taxable goods or services aren’t required to obtain a sales tax license or collect sales tax.
“Use tax” refers to taxes on goods eligible for sales tax, but no sales tax was paid when the goods were obtained. You may not have paid sales tax when obtaining taxable goods or using taxable services, but you’re still expected to pay it later.
Franchise Tax
Some states impose a franchise tax for simply doing business in the state. It doesn’t apply to opening a franchise, franchising your business, or opening a second location. Any business you open in a franchise tax state must pay the franchise tax.
Franchise tax is usually a flat percentage tax but may be calculated on the gross receipts of your business, adjusted gross income, or the total net worth of your business. Laws vary from state to state, making the situation slightly complicated for multi-state businesses. If you don’t understand your franchise tax obligations, seek tax advice from a professional.
Employment or Payroll Taxes
Employment tax or payroll tax is the tax you pay on any salaries, wages, commissions, or bonuses earned by your employees. If you don’t have employees, this doesn’t apply to you. You may be responsible for paying self-employment taxes if your business is considered a sole proprietorship, a single-member LLC, or a partnership for tax purposes.
Payroll taxes include Social Security (12.4%) and Medicare tax (2.9%). There are also Federal Unemployment Taxes (FUTA at 6%) and State Unemployment Taxes (SUTA; the percentage varies from state to state).
Employers are responsible for tax withholding in employee paychecks and contributing half of each employee’s Social Security and Medicare tax. The other half is automatically deducted from the taxpayer’s earnings.
How To Take Business Tax Deductions and Credits
Managing tax liability is a major concern for most businesses. Reducing the amount of taxes you pay can leave you with enough capital for growth, expansion, and hiring new employees.
Each type of business may be eligible to take certain tax credits and deductions. For more specific information, consult an accountant or a tax attorney specializing in assisting businesses in your state.
Common Tax Deductions
Business expenses are tax deductible. The money you spend to keep your business running can’t be taxed as business income. Examples include:
- Wages, salaries, or benefits paid to employees
- Workspace deductions, like rent on your commercial space or deductions for your home office space
- Business supplies, like printer ink and paper
- Business insurance costs
- Vehicle and travel costs, like delivery vehicles or traveling to meetings or industry events
- Startup costs for new businesses and entrepreneurs (not available to all businesses; the maximum deduction is also capped)
Common Tax Credits
Tax credits can be tricky. It’s best to speak with a tax professional to determine your eligibility. Common examples include:
- Research and Development Credit: This credit applies to certain research initiatives and may be difficult to qualify for. Consult with a tax attorney for more information.
- Work Opportunity Tax Credit: This credit is for hiring employees from specific groups or classes.
When Are Quarterly Taxes Due?
Quarterly taxes are due approximately two weeks after the end of the fiscal quarter. January payments don’t need to be made if annual taxes are filed on time and you don’t owe taxes at the end of the filing period. You can pay your remaining balance when you file annual taxes, and you will not be expected to make a quarterly payment by Jan. 15.
| Quarterly Payment Period | Tax Deadlines |
|---|---|
| Jan. 1 - March 31, 2024 | April 15, 2024 |
| April 1 - May 31, 2024 | June 17, 2024 |
| June 1 - Aug. 31, 2024 | Sept. 16, 2024 |
| Sept. 1 - Dec. 31, 2024 | Jan. 15, 2025 |
You may be granted an extension if you have a valid qualifying reason. Major disasters or serious emergencies sometimes warrant an extension on your taxes. Failure to file on time or misunderstanding the filing guidelines won’t qualify for an extension.
It can take several weeks to get approved for an extension, so it’s best to request an extension as soon as you believe you’ll need one. If you aren’t granted an extension before the due date or don’t qualify, you may have to pay a penalty.
Who To Pay Quarterly Taxes To
Federal quarterly taxes will always be remitted to the IRS. State and local taxes will be remitted to different agencies depending on the nature of the tax. State income tax usually goes to your state’s Department of Revenue, while local taxes go to your municipality.
You can expect to make several electronic payments or send several checks. They will all have the same due date.
What Happens if You Underpay or Overpay on Quarterly Taxes?
Underpayments need to be corrected immediately. If you underpay for the year because your quarterly estimates were too low, you can rectify your underpayments with your final quarterly payment. If you come up too short at the end of the year, you may be subject to an underpayment penalty.
If you overpay for a quarter, you’ll simply owe less next quarter. There is no tax penalty for overpayment unless the IRS believes you’re abusing the system with deliberate overpayments to disguise earnings.
It’s rare to overpay for the entire year because the final quarter occurs at the end of the fiscal year. If you enter the final quarter with an overpayment, you may not owe any taxes in the last fiscal quarter. If you’re still overpaid, you can receive a tax credit or a refund for your overpayment.
Refunds are most common with sole proprietorships or business structures taxed as sole proprietorships because personal deductions and business deductions occur simultaneously. A sole proprietor is an individual. The potential for tax deductions is greater, so tax liability tends to be lower.
Stay Compliant with Mosey
Federal quarterly tax compliance is the same wherever your business is located, but state and local quarterly tax compliance can vary significantly. Keeping track of tax compliance can be complicated, especially if you operate a multi-state business. That’s where Mosey comes in.
Mosey’s automated compliance tools help small business owners keep track of state and local compliance issues, like taxes. We can keep track of tax compliance while you focus on running your company. Schedule a demo with Mosey to learn how else we can help.
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