Here’s a really simple guide to making quarterly estimated tax payments for your business.
Just like when you receive wages and your employers withholds and deposits tax, you must do the same for yourself when you own a business. US Federal Income Taxes are “pay as you go” and not “pay once a year”. You can’t just make a bunch of money and pay the IRS in the following year. They will hit you with a penalty if you do that, though the penalty is not large – it’s mostly interest.
Requirements for Estimated Taxes On Your Business Income
For taxpayers with prior year adjusted gross income below $150,000, you must pay 90% of the current year’s tax or 100% of the prior year’s tax.
If your business made more than $150,000 you are supposed to pay 100% of this year’s tax or 110% of last year’s tax.
Note that there are special rules for farmers and fishermen.
If you do not pay in at least this amount, you will be subject to penalty.
What do these rules mean and why is the rules written this way?
The tax code is actually giving you a break here. If you have an unexpected jump in business during the year, and you at least paid installments that equal your last year’s liability, you do not face a penalty. You still have to pay the remainder of the tax by the due date for the tax year, of course. That’s the intent of these rules.
Business Estimated Taxes – Figuring Your Tax Payments
If you expect business to be fairly close in income as compared to last year, it’s usually prudent to pay 100% of last year’s tax liability. This amount can be found on your individual tax return (form 1040, on page 2). Note that this is not how much you “owe with your tax return” nor does it involve your refund in any way. It’s your “total tax” liability for the year.
Once you have this figure, divide this by four and make quarterly payments.
If you expect business to either jump or decrease substantially it’s probably best to seek professional advice. Your goal will now be to make sure you pay enough in tax to where you are not buried by your remaining tax liability at the end of the year. Though if you are expecting less in profit as compared to the previous year, then you do not want to overpay.
You will have to run your estimated numbers through a tax calculator – which can become kind of complex. You can contact us if you would like to hire us to do it for you, we only charge new clients $159 plus tax for tax planning all year. For return clients (if you do your income taxes with us) we do this for free. We have some pretty awesome tax planning software.
Take Note: Quarterly Estimated Business Income Taxes are NOT the Same Thing as Quarterly Sales, Payroll Taxes, or General Excise Taxes
Some taxpayers mistake quarterly estimated tax payment with other taxes that are paid quarterly. This includes state sales tax, payroll taxes, unemployment insurance, and Hawaii General Excise Taxes (there may be more examples of quarterly taxes).
It is important to realize that these taxes are TOTALLY separate to quarterly estimated taxes. Estimated income tax is an additional requirement and this has nothing to do with those other requirements.
Just understand that the term “quarterly taxes” can mean more than one thing.
Making the Estimated Tax Payments
Once you know how much tax you plan to pay for your business for the year, the next step is to fill out form 1040 ES which can be found here (link opens a new tab).
The address and to whom to send your payment is on page 4 of the instructions.
Fill out the forms and attach your payments on time.
You can also make electronic payments to the IRS at IRS.gov/payments.
When are Business Estimated Taxes Due?
The quarterly payments are not broken up symmetrically. The due dates are April 15th, June 15th, September 15th, and January 15th of the following year.
You can skip the last payment if you file and pay your taxes by February 1st. This can be cutting it close, however, as filing season often opens late.
You do not have to submit payment until you actually make money in any quarter – but it’s often best just to split the payments into 4 and make the first payment by the April 15th due date.
We recommend, if you have a decent refund coming, to apply it toward your first and second estimated tax payments. You do this by indicating the appropriate amount on your tax return. Note that you do not make interest on the money they hold for you, so it may not be the best option to leave a bunch of money on account with the IRS, but it does reduce the paperwork involved.
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Contact us through our business tax page if you wish to inquire about our estimated tax and other business tax services.