Are you confused about whether you should pay estimated tax payments? That’s understandable since business owners may run their businesses as sole proprietorships, limited liability corporations and other types of corporations. Because these businesses are structured differently, it stands to reason there may be different requirements for each entity type.
Individuals like independent contractors, freelancers, and landlords don’t withhold taxes from a paycheck and usually need to send in estimated tax payments. Because corporations can’t always predict their income, these business owners may also need to make tax payments.
The purpose of this post is to let you know whether you should pay estimated tax payments, how to submit tax payments and the importance of making timely remittances.
But first things first:
What Are Estimated Tax Payments?
According to the IRS, “Estimated tax is the method used to pay tax on income that is not subject to withholding. This income includes earnings from self-employment, interest, dividends, rents, and alimony. Taxpayers who do not choose to have taxes withheld from other taxable income should also make estimated tax payments. This other income includes unemployment compensation and the taxable part of Social Security benefits.”
Who Should Pay Estimated Tax Payments?
The IRS provides guidelines regarding who needs to make payments to cover income, self-employment, and alternative minimum tax.
- Sole proprietors, partnerships and S Corporations should file estimated tax payments when you expect to pay at least $1,000 in taxes when filing your return. Take into consideration any tax deductions and credits you can claim to reduce the tax you owe. Corporations are only required to pay estimated taxes if they expect to owe $500.
- If you owed tax the previous year, you should start paying these quarterly taxes to the IRS the following year. In all likelihood, when you file your next tax return, you will owe as much quarterly tax or more as your business grows.
Who Shouldn’t Pay Estimated Tax Payments?
- Your prior tax year covered a 12-month period and you had no tax liability. Also, you were a U.S. citizen or resident for the whole year.
- You filed a tax return and didn’t owe any tax or paid at least 90% of the tax due prior to filing your tax return.
How Do You Submit Estimated Tax Payments to the IRS?
IRS estimated tax payments are paid four times per year which occurs about 2 weeks after each quarter ends. For 2019, the payment due dates are April 15, June 17, September 16, 2019, and January 15, 2020. If you overpay, you can get a refund or apply the overpayment to future estimated tax payments.
For a more in-depth look regarding how to pay quarterly taxes, see these two posts:
You can make estimated payments to the IRS using any of the following methods:
- Online transfer from a checking or savings account
- Debit or credit card at IRS.gov/payments or by a phone call to one of the service providers listed within this document.
- Electronic Federal Tax Payment System (EFTPS) – there’s a record of payments so you can see the date you paid and the amount.
- Online monthly installments
- Check or money order
- Mobile IRS2GO app
When sending a payment check or money order, complete an estimated tax payment voucher, 1040-ES to make sure your payment is credited correctly to your social security number.
Helpful Tips Regarding Estimated Tax Payments
- To know whether you should submit estimated tax payments, you must review all income you receive. As one year ends and another begins, keep track of whether your income decreased or increased. Did you earn additional income from dividends, gains from selling assets, or increased business earnings? Make adjustments in your estimated tax payments based on whether you expect your income to increase, decrease, or stay the same.
- A good rule of thumb is to pay 100% of the estimated taxes you paid the previous year and no less than 90%. It’s important to make no less than four payments to the United States Treasury. If you miss one payment and double up on the next, the IRS may charge you an underpayment penalty. Likewise, if you fail to send in an adequate amount of estimated tax, the IRS tacks on a penalty when you submit your tax return and pay the remaining tax due. In 2017, the IRS reported that 10 million taxpayers in 2015 paid a penalty for underpaying their taxes. As a remedy, the IRS suggests that you increase the amount of estimated tax you send in or increase withholdings on your paycheck.
- Schedule tax payments on a physical or digital calendar 2 weeks prior to each quarterly deadline to avoid paying late and possibly incurring a penalty. Set aside money to pay these taxes in a separate account so it’s always available. Otherwise, you may spend tax money on something else.
- If you’re a sole proprietor and your spouse is working, you can avoid paying estimated taxes altogether. Your spouse can increase their withholdings to cover the tax liability for your business.
- Don’t confuse quarterly estimated tax payments that pay self-employment and federal income tax you owe on your tax return with payroll quarterly taxes you pay using Form 941. After each quarter, employers send in taxes withheld from employees’ checks for federal income tax, social security, and medicare. The 941 quarterly tax payment also includes your employer share of social security and medicare taxes.
Camino Financial Wants You to Succeed
Running a business is challenging and requires you to make informed decisions on numerous issues. For example, if you’re required to make estimated tax payments, it makes good business sense to keep on top of IRS regulations. Staying organized and making four payments to the IRS each year then becomes a painless task.
Did you know that keeping your business compliant could help you qualify for a small business loan? Lenders prefer lending to businesses that don’t have negative entries on their credit histories.
This post is one example of how Camino Financial stands behind our motto, “No Business Left Behind.” We provide the resources and tools you need to stay up to date on trending topics so you can grow your business.
To keep learning about taxes, check out these complete guides on how to file taxes: