In addition to the many other hurdles new entrepreneurs face, entrepreneurs and freelancers face a range of tax requirements. Not the least of which involves making estimated tax payments throughout the year. While many are aware that they have to pay estimated taxes, in practice these calculations prove to be more complicated. Many find it difficult to properly budget for these costs, leaving them with high tax bills that they cannot afford to pay. For some business owners, the tax debt resulting from tax arrears, interest, and penalties can even jeopardize your business’s ability to grow and prosper. However, it is possible to get around these problems by setting up the right tax processes.

What are Estimated Tax Payments?

The basic concept of estimated tax payments is this: at the end of the year, each individual and company must have paid a certain amount of tax that corresponds to their earnings. In fact, these tax payments are made throughout the year based on what each individual and business expects them to earn over the 12 months.

When working for an employer, most individuals will have withheld a certain percentage of their income so that their employer can make these payments on their behalf. The employer then reports the payments made through Form W-2.

Small business owners, on the other hand, are responsible for estimating and making their own tax payments throughout the year. Typically, these estimated tax payments are due on January 15, April 15, June 15, and September 15 of each year.

This requirement applies to individuals receiving 1099s, sole proprietors, shareholders of S corporations, owners of LLCs treated as disregarded entities or taxed as partnerships, and anyone who meets the filing requirements and has not withheld taxes.

Where do small businesses go wrong?

It would be easy to think that most small businesses are in trouble simply because they don’t pay their estimated taxes. It turns out that the reality is more complex. It is much more common for entrepreneurs to make a mistake, pay the wrong amount or miss a deadline. Entrepreneurs assume they’ve done what it takes, only to find out months later that they’ve made a costly mistake.

Many don’t realize that estimated tax payments include federal income tax (ranging from 10 to 37 percent), state and municipal taxes (ranging from 0 to 13.3 percent), and self-employment tax — if any. If you don’t factor in all of these tax payments, some business owners may miss out on the budget needed to cover the full cost.

To make matters worse, the IRS and the state tax authorities charge penalties and interest for late estimated tax payments. Often, business owners are only notified of arrears after their tax returns are filed at the end of the year. This leaves entrepreneurs with a large and unexpected tax bill.

Avoid problems with estimated tax payments?

There are a few options for handling your quarterly tax payment calculations:

If you have a good idea of ​​how much you will be earning throughout the year, you can estimate the full amount you owe for the year and then send a quarter of that amount to the IRS. Alternatively, you can estimate your tax bill for the year based on what you’ve earned so far. Use these numbers to forecast your earnings and deductions for the year. If you are married and your spouse works for an employer that withholds taxes from their paychecks, you may not be able to pay taxes at all. You can update your spouse’s W-4 form to withhold the amount for your income and theirs.

While the IRS provides documentation and worksheets to help you with these calculations, it quickly becomes complicated to navigate these rules on your own, increasing the chances of mistakes and business owners becoming overwhelmed. The easiest way to avoid falling into the estimated tax trap is to work with an accountant the moment you start your business or as soon as you realize you have payments to make. Doing this will ensure you never pay more than you need to – and save you the stress and frustration of going it alone.

The opinions expressed here by Inc.com columnists are their own, not Inc.com’s.

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