{"id":5995,"date":"2024-03-06T12:49:04","date_gmt":"2024-03-06T17:49:04","guid":{"rendered":"https:\/\/www.incsight.net\/?p=5995"},"modified":"2026-07-08T16:37:01","modified_gmt":"2026-07-08T21:37:01","slug":"what-are-estimated-taxes-and-how-do-i-pay-them-3","status":"publish","type":"post","link":"https:\/\/www.incsight.net\/blog\/2024\/03\/06\/what-are-estimated-taxes-and-how-do-i-pay-them-3\/","title":{"rendered":"What Are Estimated Taxes and How Do I Pay Them?"},"content":{"rendered":"
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This is the\u00a0eighth\u00a0post in our \"Starting a Business Series\".\u00a0<\/p>\n

Estimated taxes are a topic or area that often confuses both new and established business owners. My hope here is to give you a clear understanding of what estimated taxes are, how you calculate them, and how you pay them.<\/p>\n

By gaining this knowledge it help you avoid having big tax surprises along with potential interest and\/or penalties!<\/p>\n<\/div><\/div>\n\n

When Do You Owe Taxes On Your Earnings?<\/strong><\/h1>\n

The US Tax System is a pay as you go system. This basically means that as your earn money you owe taxes on it.<\/p>\n

This is idea is often surprising or confusing.\u00a0Essentially, if you make $85,000 in\u00a0the first quarter of the year, you\u00a0<\/span>do not<\/span><\/strong>\u00a0<\/span>have until you file your tax return to pay the taxes on that. Rather, you owe taxes on that in Q1.<\/p>\n

Let\u2019s look at this as a W2 earner because it will help hopefully make the picture more clear.<\/p>\n

Imagine you are a highly compensated W2 employee earnings $340,000 a year ($85,000 per quarter). As you get your paycheck every other week your employer will pull all sorts of taxes out of it (Federal Withholding, State Withholding, and FICA which is Social Security and Medicare). In this scenario you are paying taxes as you earn the money, your employer is just calculating and paying that for you, on your behalf.<\/p>\n

Now lets flip the switch, you are a new business owner that made $85,000 in quarter 1. You have no employer, you are your own boss and you are responsible for paying those taxes on your own, as you earn the money.<\/p>\n

This is where estimated taxes come in. They are a vehicle to pay taxes into both the federal and state\u00a0agencies on a somewhat quarterly basis to cover the amount you earn or expect to earn.<\/p>\n

One thing to note, if you are an S Corp and taking a salary as the owner, you are likely paying in taxes on that salary amount, but\u00a0the amount you take as a distribution you would not be.<\/p>\n

How Does the Year-End Tax Return Play Into All Of This?<\/strong><\/h1>\n

Your year-end tax return is simply a reconciliation of what you earned, what you paid, and then reporting all of that to the government agencies. Based on your report (tax return) you will either receive a refund or owe taxes\u00a0to the government.<\/p>\n

Refund<\/strong>\u00a0<\/span>\u2013 A refund simply means that you paid too much in taxes throughout the year and the government is just giving that overpayment back to you.<\/p>\n

Amount Owed<\/strong>\u00a0<\/span>\u2013 An amount due when filing simply means that you did not pay enough in taxes throughout the year and you need to cover the rest of your bill. There is potential to have both interest and penalties if you end up owing taxes at year-end.<\/p>\n

That is it, the year-end tax return is simply sending information to the government agencies that tells them what you earned throughout the year and any payments you made. Think of it like a reconciliation and you are just truing up with the government at that time.<\/p>\n

When Are Estimated Taxes Due?<\/strong><\/h1>\n

Estimated taxes are due on a \"quarterly\" basis. However, for whatever reason,\u00a0when it comes to estimated taxes the IRS does not recognize the normal quarters so I want to clearly outline what months are included in each quarter for estimated tax purposes.<\/span><\/p>\n