Hi, Alan.
We first must ask you two questions. The most important is the one that Laura asked: Is your business conducted as a sole proprietorship, or in some other ownership, such as a corporation or a partnership? And the second question is: Do you keep a separate set of books (or Quicken file) for the business, or is it simply a part of your single Quicken file for your family finances?
For now, I'll assume a sole proprietorship kept in your single family Quicken file.
A sole proprietorship business does not pay any federal income taxes. The owner of that business includes the business net income (or loss) in his own individual income tax return. But this business income is only one part of the tax return. That income must be combined with income from interest, dividends, capital gains - and wages from a second job - or even profits (and losses) from one or more other businesses. But even if the individual has no income from any other source, the income tax calculated on the business income is not an expense of that business.
Also, of course, the sole proprietor must calculate and pay Self-Employment tax on that business net income; this SE tax is also not a business expense. The income tax and SE tax are added together on Form 1040 and paid as a single sum. The owner must estimate how much combined taxes will be due at year-end and then pay the combined taxes (less any expected withholdings from wages) in advance installments.
The business bank account belongs to the owner and he is clearly entitled to pay his personal expenses from that account if he chooses. But he is not entitled to deduct those payments as business expenses. If he keeps a separate set of books for the business, then those payments on individual taxes should be recorded as withdrawals by the owner, just as if he had transferred money to his non-business checking account or cashed a business check for personal use. Until it is applied to the actual tax as calculated after year-end, the advance payments are an asset - but they are an asset of the individual owner, not of the business. And when the advances are applied to settle the actual tax bill, they become the owner's expense, not business expense.
So, in the combined Quicken file, create a new Asset Account called something like Prepaid Federal Income Tax. Charge each quarterly estimate payment to this account. At year-end, there should be 3 payments in this account. In January, add the 4th quarter payment to this account. In April, when you know what the actual tax is, record it as an expense of the prior year. That is, in April 2010, you should record the 2009 tax and date the entry 12/31/2009. Record the entry in the Register for the Prepaid asset account; charge the actual tax amount - NOT just the balance due - to the Federal Income Tax Expense and Federal Self-Employment Tax Expense categories, but code those categories as personal expenses, not expenses of the business. That should leave a balance in your Prepaid account. If you've overpaid, there should be a positive Prepaid balance left in the account, equal to the refund you've calculated. If there is a balance due on your return, it should equal the negative balance in your Prepaid account, equal to the check that you must write by April 15, 2010.
That brings us to payments on the 2010 taxes. If you have an overpayment for 2009 and elect to apply it to 2010, just leave the balance in the Prepaid account and add any new checks to it. If you owe a balance for
2009, the Prepaid account should be back to zero after you charge that final check to this account. At this point, AFTER settling for 2009 and BEFORE starting on 2010, the Prepaid FIT account should be zero, except for any refund applied to next year.
As I've hinted above, Alan, the answers for a corporate or partnership business would be different. Please answer the questions we asked at the beginning so that we can be sure our advice is appropriate. And remember, I've been retired for 20 years, so check with your own CPA to be sure that the rules haven't changed.
Sorry for such a long answer to your short question, but there are SO MANY CONTINGENCIES that must be considered. Actual situations - with full facts known - are MUCH easier to deal with than hypothetical situations with many unknowns.
RC