Estimated tax payments are one of the biggest shocks for new business owners. They know that they have to pay taxes, they just don’t realize they have to send in a check four times a year! Most businesses that expect to more than $1,000 – or $500 if the company is incorporated – in taxes have to make estimated payments to the IRS. And, since the next quarterly payment is due on September 15th, we thought it’d be a good idea to do a quick rundown of what estimated tax payments are.
What are estimated tax payments?
Exactly what they sound like. These payments are simply what you’d normally owe on your income. However, since you don’t have an employer to withhold and send in what you owe, you have to do it instead.
You’ll also have to withhold a ‘Self-Employment tax,’ which is whatever you owe for social security and medicare. Just like with normal income, the total amount you have to send in depends on how much money your business earns, with the tax rate increasing along with income.
How do I know how much I owe?
That’s a tough question to answer. Most professionals would recommend that, to be safe, you at least pay as much as you did last year. But if you just started your business, what you paid last year may be vastly different than what you pay this year. Alternatively, you can use what you made during the quarter you’re paying as a guideline for the rest of the year. So, if you’re paying September 15th, you can calculate what you should send in based on the amount you made between June and now. Remember that you can always adjust your payments if needed – you just need to make sure that, at the end of the year, you’ve paid at least 90% of what you rightly owed, or you could be hit with fines. Sole proprietors, LLC partners, and S-Corp shareholders can use Form 1040-ES, and Corporations can use Form 1120W, to help figure out what they owe.
When do I have to send these payments in?
Technically, you can send in your entire year’s estimated tax, as long as you do it by April 15th of the year you’re estimating. However, most businesses don’t have that much extra money floating around, and instead opt to file quarterly. The IRS requires that quarterly payments be sent in by the 15th of April, June, September, and January. If the 15th falls on the weekend, the deadline moves to the following Monday.
Estimated quarterly taxes may be a pain, but you cannot ignore them. The Federal government will come after you if they think you owe them money. Further, most state governments also require estimated tax payments to be sent in, and calculating your federal tax burden helps you determine what you should send the state. As always, we recommend you meet with an accountant or other professional to weight your options and find out exactly what you owe.
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