For new small business owners, meeting your tax obligations is a big adjustment – particularly when you’ve been used to having an employer take out income tax withholdings with each paycheck. When you have your own business though, tax time isn’t just once a year; rather you have to make estimated tax payments throughout the year.
If you’re not sure if you need to pay estimated taxes for your business, read on to learn more about small business estimated tax payments:
What are estimated tax payments?
Individuals and businesses are required to pay taxes over the course of the year, and not just at “tax time.” If you’re working for an employer, your employer most likely withholds these taxes for you throughout the year. When you’re self-employed or own a business, you’ll be expected to make these tax payments to the IRS and state on your own.
Who has to pay estimated tax payments?
The rules for estimated tax payments vary based on business type:
- For sole proprietors, partnerships, S Corporation shareholders, single member LLCs who elect to be taxed as a sole prop or an S corporation, or multi-member LLCs who elect to be taxed as a partnership or an S corporation: If you expect to owe $1,000 or more in taxes when you file your income tax return, you most likely will need to make estimated tax payments to the federal government (and potentially your state government too). There’s one exception: if your witholdings and tax credits add up to as least as much as your prior year’s tax, you do not need to made a federal estimated tax payment.
- For C Corporations and multi-member LLCs who elect to be taxed as a C Corporation: If you own a Corporation, you will need to make estimated tax payments if you expect to owe $500 or more with your tax filing.
When are payments due?
Estimated tax payments are divided into four payment periods throughout the year:
- April 15th
- June 15th
- September 15th
- January 15th
If your business is a Corporation, your estimated taxes are due on the fifteenth day of the 4th, 6th, 9th, and 12th month after the end of your company’s fiscal year.
Once you’re in the system, the IRS will send you estimated payment vouchers at the end of each tax year. However, whether you receive these payment vouchers or not, it is your responsibility to make payments for both the Federal and State taxes.
How to Pay
If you’re filing as a self-employed individual or disregarded entity (i.e. single-member LLC, partnership, or S Corp shareholder), you should complete Form 1040-ES. This form contains blank vouchers for mailing your estimated tax payments. You can also make your payments using the Electronic Federal Tax Payment System (EFTPS). For your state payment, you have to search online for the appropriate form, complete it and send it in with your payment.
Corporations must submit their payments using EFTPS, or can arrange for a tax professional, financial institution, payroll service, or other trusted third party to make deposits on their behalf.
How much should you pay?
- For self-employed individuals and disregarded entities (i.e. single-member LLCs, partnerships, and S Corp shareholders), the IRS recommends using Form 1040-ES to calculate your individual estimated tax payments.
- Corporations should use the Worksheet on Form 1120-W to calculate estimated tax payments.
Alternatively, if you expect the current year’s earnings to be relatively similar to last year, you can use last year’s tax return to calculate your estimated payments. Or if you experience fluctuating income, you can choose to calculate your estimated taxes based on the actual amount you made that quarter.
You don’t need to show the IRS how you arrived at your estimated sum. However, it’s in your best interest to reach as accurate a figure as possible. Paying too little can result in an unfortunate surprise when it’s time to file your annual taxes, in addition to potential penalties for underpayment. Conversely, by paying too much, you’ve essentially taken money out of your business and you could have invested that money for a higher return.
If you’re unsure about your estimated tax obligations, it’s wise to consult a tax specialist who can advise you on the best calculation method for your business and how to properly track and record your earnings and deductions. Just remember the more time you invest in your estimated tax payments, the easier your life will be come tax time.
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