How to pay estimated tax payments • expex Inc.

10 Feb

The thought of calculating estimated quarterly tax payments can be daunting. The key to successful estimated tax planning is in the process and understanding how to project for these quarterly payments. For this particular discussion, we are focusing on federal estimated tax payments.

If you live or do business in a state with income tax, you may also need to calculate estimated state quarterly tax payments.

What are estimated tax payments?

Estimated tax payments are made quarterly based on the filer’s income. Small business owners, freelancers, and independent contractors who do not have automated tax withholding end up paying estimated taxes. Estimated taxes may encompass tax on any income not subject to withholding, such as dividend income, rental properties, interest, and capital gains.

The average employee has taxes withheld automatically directly from their paychecks. Business owners and self-employed individuals have to estimate the taxes and pay the tax themselves.

Do I have to make estimated tax payments?

According to the IRS,

Generally, you must make estimated tax payments for the current tax year if both of the following apply:

You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits.
You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your current year’s tax return, or
- 100% of the tax shown on your prior year’s tax return. (Your prior-year tax return must cover all 12 months.)

This applies to S corporation shareholders, sole proprietors, a partnership, and self-employed individuals.

There are special rules for:

Farmers and fishermen
Certain household employers
Certain higher-income taxpayers
Nonresident aliens

How to calculate my tax payments

The calculation formula requires that you total your annual tax liability and be sure to include self-employment tax, income tax, and any other taxes. Once you have the total, divide by four, creating the quarterly payments.

There are resources available to help you calculate your quarterly estimated tax payments:

For individuals: the IRS provides Form 1040-ES for estimating individual taxes
For corporations, the IRS provides Form 1120-W to assist with corporate estimated tax calculation.

Estimated tax payments example

Small business owners are an excellent example of people who pay estimated taxes. Let’s use an example of a business with employees, the owner takes a salary, and the company is structured as an S Corp. Even if the owner is properly withheld through payroll, the business income has not been taxed. Since all income in an S Corp flows through to the owner’s personal return, they will show income that is not taxed. This will create a situation where taxes will be owed, and estimated taxes will need to be paid. If the owner shows an income of about $150,000, they will need to pay estimates of 110% of their tax owed to meet the safe harbor rule.

When are estimated tax payments due?

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you don’t pay enough tax by the due date of each payment period, you may be charged a penalty even if you’re due a refund when you file your income tax return at the end of the year.

The IRS estimated quarterly taxes are due:

For the period January 1 to March 31: Payment is due on April 15
For the period April 1 to May 31: Payment is due on June 15
For the period June 1 to August 31: Payment is due on September 15
For the period September 1 to December 31: Payment is due on January 15 of the following year
Note: If your tax year doesn’t begin on January 1, see the special rules for fiscal year taxpayers in Chapter 2 of Publication 505

If you mail your estimated tax payment and the date of the U.S. postmark is on or before the due date, the IRS will generally consider the payment to be on time. If you use IRS Direct Pay, you can make payments up to 8 p.m. Eastern Time on the due date. If you use a credit or a debit card, you can make payments up to midnight on the due date.

Estimated tax payments do not have to be complicated.

Understanding your business’ financial status on an ongoing basis is vital to successful tax planning. The simplest way to prepare for tax season is to have a checklist to prepare your books quickly and efficiently for your tax professional. Throughout the year, accurate and consistent bookkeeping can make all the difference. Expex understands small business and provides automated bookkeeping services that you and your accountant will fall in love with.

Expex is based in Schenectady, NY, offering convenient and innovative bookkeeping services to help your business succeed. Our application, Carly, can do everything a traditional bookkeeper does and more. At Expex, we help our clients prepare for year-end by delivering tax ready financial statements every month. We also work with their CPA’s to create the reports they need to provide insights into their business to identify issues throughout the year quickly. Call (518) 389-2305 today to get started, or contact us to learn more about Carly.