It’s an awesome feeling when your company’s profits start to grow.  However, it can be misleading.  You will need to pay taxes.

The US federal system is based on a pay-as-you go approach.  In other words, as you generate profits, you will need to pay taxes on them.  This is done through estimated tax payments, which are made on a quarterly basis.

Despite all this, it’s common for business owners to ignore things — and spend their profits on cars, houses, jewelry and so on.  But at some point, the tax authorities will catch on and you’ll owe back taxes, interest and penalties.

The fact is that you must pay a variety of taxes, which include the following:

• Federal income tax
• Social Security
• Medicare

Oh, and depending on where you live, you may owe state income taxes, disability insurance and even local taxes.  As you can see, your profits can easily be drained away.

So how much do you need to pay in estimated taxes?  Keep in mind that this is based on your complete tax situation.  For example, if your business produces losses, then you probably owe nothing.  Or, if you have a side job — or your spouse is employed — there may already be enough taxes withheld.

But, you will probably need to pay estimated taxes if you meet the following:

• You owed taxes last year
• You expect to owe at least $1,000 in taxes this year

If so, there are several ways to come up with the amount for estimated taxes:

Prior Year Amount:  You pay the same amount as you did last year.  But this really works for those whose AGI is no more than $150,000.

Example:  Last year, you paid $12,000 in taxes.  So as for this year, you will pay $3,000 per month in estimated taxes ($12,000 divided by four quarters).

What if you owe more taxes for the tax year?  In this case, you do not owe interest or penalties since you can make up for the excess amount by April 15th.

90% Method:  If you think that your income will be less this year, then you can pay 90% of last year’s tax liability.  But, this will not work if you owe more than $1,000 and wind up actually paying less than 90%.  You will likely owe interest and penalties.

Complex Method:  For those with irregular income, this may be the best approach.  Basically, this involves recalculating your taxes every quarter and making the necessary payments (this is something Taulli.com can help you out with).

Deadlines and Forms

The deadlines for making estimated tax payments include:

• Quarter 1:  April 15th
• Quarter 2:  June 15th
• Quarter 3:  September 15th
• Quarter 4:  January 15th

You will need to send a check with a voucher for each deadline (see Form 1040-ES for this process). 

Side Business

Interestingly enough, if you have a side business, then you might instead want to increase the withholding with your employer.  This may mean it’s unnecessary to pay estimated taxes.

To do this, you need to fill out a Form W-4 and submit it to your employer.  On this form, you can indicate how much extra — per paycheck — you want taken out.