by Bill Burnham | February 22, 2019
Many business owners are surprised when they realize how much they actually owe the Internal Revenue Service (IRS) when tax time rolls around. Whether out of ignorance or neglect, this is often the result of a failure to make quarterly estimated tax payments. Making these quarterly payments can cause cash flow issues if the business owner has not planned ahead.
There are five questions every business owner should ask regarding quarterly estimated tax payments.
What are they?
The IRS operates on a pay-as-you-go system. As income accumulates during the year, the IRS expects to receive payments which approximate the amount of tax liability on that income. For individuals who work a regular job, this happens automatically through withholdings from their paycheck. However for the self-employed, whether sole proprietors, partners or S-corporations, these payments are often overlooked.
Do I have to make them?
According to IRS regulations, self-employed individuals who are sole proprietors, partners or S-corporation shareholders, generally have to make estimated payments if they expect to owe $1,000 or more when their tax return is filed. For C-corporations the minimum threshold is $500. Business owners are not required to make quarterly payments if the company had no tax liability in the prior year, or if the prior tax year covered a full 12-month period and the owner is a U.S. citizen.
When are they due?
Payments are due four times a year. For business owners whose tax year starts on January 1, the specific due dates are April 17, June 15, September 17 and January 15 of the following year. If the tax year does not begin on January 1, the payments are due on the 15th day of the 4th, 6th, 9th and 1st months of the tax year. If these dates fall on a weekend or holiday, the dues dates shift to the next day that is not a weekend or holiday.
How do I know how much to pay?
In order to calculate the estimated tax, you must know your adjusted gross income, taxable income, taxes, deductions and credits for the year. Using the previous year’s amounts for these categories is a good place to start. The IRS offers form 1040-ES for use in figuring the estimated tax for individuals and form 1120-W for corporations. Though there are penalties for underpayment, the penalties are not in effect if the tax liability is less than $1,000, or if at least 90 percent of the tax liability was paid, or 100 percent of the previous year’s tax liability was paid. The IRS will choose whatever penalty is smaller. There are certain other situations where the penalty may be waived.
How do I pay them?
The payments may be made online, by phone or by mail. The online Electronic Federal Tax Payment System (EFTPS) is the easiest way to pay and allows you to access your payment history.
If figuring out your quarterly payment amounts on your own still seems like a challenge, consider enlisting a local no-cost resource, such as the professionally credentialed consultants at the Florida SBDC at USF, to assist.