Estimated Tax Payments; Do I Need to Make Them, When and How?
The Perfect Storm
Business owners that are not aware of the estimated tax payment requirements can find themselves in a deep hole at tax time. Here’s a “the perfect storm” scenario:
April 15th is the due date for the balance of the prior year tax liability. It is also the date for the current years’ first quarter estimated tax payments– both federal and state. If a business owner has not made any estimated tax payments in the prior year, he could potentially owe 15 months of taxes on April 15th. Add in the interest and penalties and the amount due needed to satisfy the liability can quickly become unmanageable.
For a many small business owners managing their finances can be difficult and confusing. Adding taxes to the mix can make things even more complicated. When cash is tight and Uncle Sam comes knocking on your door asking for your quarterly estimated tax payments, cash becomes even tighter. Not planning for these payments compounds the problem even more.
What are estimated tax payments?
Estimated tax payments are payments made if your income tax withholding will not fully cover next year’s tax liability. This happens for business owners because they pay taxes differently than an employee does. An employee of a business is having their taxes withheld from them each payroll period. As a business owner though, you may have taken a payroll check and had taxes withheld from that too. However, as a business owner you also are required to pay taxes on the profit of your business. Taxes are not being withheld for the business which is why the IRS and the State says you must pay in as you go, every quarter.
These tax payments are based on the profitability of your business and other sources of income you have; stocks, W-2, real estate, etc. For most business owners, income from their business is the most significant source of income. The amount of tax you pay is based on how much you paid in the prior year.
For example; if your total tax liability for the year was estimated to be $25,000, then you would pay $6,250 each quarter. However, if your income increases from the business, you will need to review your estimated tax payments and determine if you need to increase them to make sure you are paying in enough each quarter. Interest and penalties can apply if not enough is paid in.
Should I be making estimated payments? What if I don’t pay or underpay?
Yes, if you own a business and are profitable you are required to make them. If you wait until the end of the year to pay them you may be charged with interest and penalties for not making these payments on time each quarter, depending on how much you owe.
When to make payments?
• April 15
• June 15
• September 15
• January 15
Managing & planning your quarterly estimated tax payments
The first step is making sure you are receiving an accurate and timely financial statement from your accountant so you can monitor the profitability of the business from month to month. This is where most business owners need to start since this is the most significant and variable source of income. This will allow you to monitor if the taxable income from the business is increasing, therefore your taxes will be increasing. Also remember, if any other sources of income are increasing (W-2, stocks), you will need to notify your accountant of that too. Keep in mind if you don’t inform your accountant of additional income you might have, they won’t know it exists and won’t be able to factor it into their tax planning.
Remember, it is much easier to stay current with Uncle Sam on a quarterly basis than having to deal with the challenges of getting behind on your tax payments. A good accountant will help you stay on top of the tax complexities so you can stay on top of your business.
For more information, contact us or call (414) 269-8705.
