Does it feel like every day is a different deadline? Read on for some small business tax advice and learn how to better manage your working capital.
What are quarterly tax payments?
Quarterly tax payments come in all shapes and sizes, but are often estimates paid for the purpose of fulfilling your annual tax obligations. The government doesn’t mandate quarterly payments from everyone because every situation is different and not all individuals or businesses owe quarterly estimated taxes.
However, since the government can’t afford to wait all year for tax revenue, they demand withholding and estimated tax payments be remitted throughout the year. For those required to make them, failure to pay quarterly tax payments can result in penalties and interest.
Types of quarterly tax payments
Income Tax for Small Business Owners
Pass-through entities, such as S-Corps and Partnerships, do not pay income taxes. Instead, they pass this income down to their owners, who pay the taxes. Therefore, the owners need to make quarterly estimated tax payments to cover the taxes on their portion of company profits that flow through to them.
Income Tax for Self-Employed Individuals
Self-employed individuals operating a Sole Proprietorship or Single Member LLC filing Sch. C do not take payroll, thus they do not remit withholding or self-employment taxes. As a result, they should make quarterly estimated tax payments based on income earned, along with SE (self-employment) tax.
Income Tax for C-Corporations
Unlike pass-through entities, C-Corporations do pay income tax. However, C-Corporations do not have to use a calendar year; they can use a fiscal year ending whatever period they choose. As such, the quarterly schedule varies based on the fiscal year.
Payroll Tax Returns
Payroll taxes must be remitted monthly or semi-weekly based on the size of your payroll and frequency, but returns must be filed quarterly. The 941 is the quarterly Federal tax return summarizing the actual payroll and associated taxes for the quarter.
Sales tax must be remitted according to your state’s filing requirements. In Minnesota, the frequencies are annual, quarterly, and monthly. This is done with actual amounts, not an estimate.
Corporation Franchise Tax & MN Minimum Fee
Depending on your entity classification and state requirements, you may have special state taxes to pay. In Minnesota, there is a franchise tax on C-Corporations and an annual Minimum Fee for S-Corps and Partnerships. It is essentially the cost to continue to do business in Minnesota. The minimum fee increases based on the size of your company, ranging from $0 to $10,380 for 2021. Depending on the cost, or the possibility you’ll grow and jump into the next bracket, you may need to pay quarterly minimum fee estimates. C-Corporations that exceed $500 in franchise tax are required to make quarterly payments.
There are too many industry specific taxes to list here, but be sure to look into any specific taxes you may be subject to based on your industry. For example, MN has a Provider Tax applied to specific health care providers and entities. If your tax exceeds $500 you must make quarterly estimated tax payments.
How are quarterly tax payments estimated and paid?
Quarterly estimated income taxes are based on your business income. Therefore, you should review your accounting for the quarter, consider your tax bracket, and pay an estimate for how much you think you’ll owe on that business income. Check out our accounting page if you need help keeping your books clean throughout the year.
Not sure where you stand? For many businesses knowing how much they are going to make in a given year or where they stand at any point in time can be a challenge. To help address this, the IRS offers safe harbor rules that allow people to avoid penalties. Using the safe harbor rules will prevent you from getting into trouble, but they aren’t always the best path to take. Working with an accountant that understands both the tax code and your business will allow you to make the smartest choices on estimated quarterly tax payments.
There are a few approaches generally taken to manage these payments.
Strategy: split payments evenly
- Reduced risk of underpayment penalties and interest
- Calculate once and schedule remainder of year
- Overpaying and/or cash flow issues
- Doesn’t take into account possible business or life changes
Strategy: vary payments quarterly
- Possibly more accurate
- Manage cash flow
- Accrual basis taxpayer may not have received money yet to pay estimates
- Miscalculating estimates and/or forgetting to recalculate
Quarterly tax deadlines
Income Tax + MN Minimum Fee (15th of following month)
Q1 = 4/15 | Q2 = 6/15 | Q3 = 9/15 | Q4 = 1/15
MN Sales Tax (20th of following month)
Q1 = 4/20 | Q2 = 7/20 | Q3 = 10/20 | Q4 = 1/20
Payroll Tax Returns (End of following month)
Q1 = 4/30 | Q2 = 7/31 | Q3 = 10/31 | Q4 = 1/31
Tips for budgeting for quarterly tax payments
Per Payment Method
For established businesses that have historical records and enjoy detail-oriented work, save taxes on each payment received so that you don’t accidentally spend it. For example, if your business has consistently taken 20% to the bottom line, and you’ve paid an effective tax rate of 30% the last few years, you could establish a system where you allocate 6% of every payment received to your tax savings account, to be remitted quarterly. Don’t forget about sales tax too!
Much more common and less work than above, small businesses with monthly financial statements can quickly and easily determine their monthly net income number, multiply by their tax rate, and move that money to savings in 5 minutes or less. Those with cash flow issues can keep it in their checking account for working capital needs, with a running tally of how much they’ll need by the end of the quarter.
If you’re worried about penalties, or need future revenue to pay your taxes, use the safe harbor rules as your guide. You may owe when you file your tax return, but as long as you’ve met the safe harbor you’ll avoid penalties and interest.
Pay the Penalties (if absolutely necessary)
We understand that businesses fall on hard times, often at unexpected times. We don’t want you to pay penalties, and we NEVER advise failing to remit payroll taxes. But for other things, such as estimated income tax payments, missing the payment to keep your business afloat and paying the penalty on your tax return may be the cheapest alternative. Look to other options first, but try to avoid high interest rate credit cards and loans. They are often more expensive than the penalties and interest will be.
Working with Haworth & Company, Ltd.
Small business tax advice is what we do best. With 30+ years of experience in the Twin Cities and Rochester, established systems, and organized professionals, you can be confident your unique situation will be analyzed so that you’re taken care of. There is no one-size-fits-all approach to small business. You need your own trusted business advisor who will get to know you and what you need, whether that’s quarterly estimated tax payments, tax saving strategies, or guidance through a hard time. Give us a call or contact us here; we’d love to get to know you.