Estimated tax payments can be confusing. It’s easy to say, “I’d rather just pay them all at once, so I’ll wait until tax time next year to do them.” But missing those payments can be costly for your business, and no small business owner has time for extra expenses right now.
What Are Estimated Tax Payments and Who Pays Them?
Estimated tax payments are something every small business and self-employed individual has to worry about. Because income taxes and others are not automatically taken out of these types of employees’ paychecks, the amounts that the business or individual will need to pay is estimated, and then paid quarterly throughout the year.
Typically, sole proprietors, partners, and S corporation shareholders are responsible for paying estimated tax, if they expect to owe tax of more than $1,000 (or $500 for corporations) when their return is filed. This includes any income that isn’t subject to withholding tax, like interest, dividends, capital gains, business earnings, and more.
Estimated Tax payments are made quarterly, on or around the 15th of January, April, June, and September of each year. Here are the 2022 due dates:
- April 18, 2022
- June 15, 2022
- September 15, 2022
- January 17, 2023: Please note that you do not have to make the last January payment if you file your 2022 tax return by January 31, 2023, and you pay the entire balance due with your return, according to IRS Instructions.
You do not have to pay estimated tax if you meet all three of the conditions below:
- You had no tax liability for the prior year
- You were a U.S. citizen or resident for the whole year
- Your prior tax year covered a 12-month period
Why Should I Keep Up with Estimated Tax Payments?
The taxes that are applicable to this rule include things like federal income tax (ranging anywhere from 10 to 37%), state and municipal tax (typically between 0 and 14%), and self-employment tax. Many businesses lose their way during this part of the process because they forget or don’t account for the right tax amounts and types. And you can incur costly penalties and interest charges if your estimated tax payments aren’t made on time.
Calculating Estimated Tax
To figure out the total for your estimated tax payments, you’ll need to calculate or find your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.
You can do this in a few different ways based on your business’s income streams during the year. For example, if your business is heavily affected by seasonal changes and preferences, you can calculate what you owe each quarter based on the amount you actually earned and spent so far. However, if your business is steadier year-round, you can calculate the entire year, figure out what you owe, and divide the total by 4 equal payments.
The quarterly approach will likely keep your taxes more accurate throughout the year, but it means you’ll spend more time during that year calculating what you owe.
The IRS has many great resources that will help you calculate your estimated taxes. Their 1040-ES pdf (which is updated every year) houses instructions and links within in that can answer many of your questions, including instructions, tax rate schedules and how to change your estimated taxes.
For corporations, you will use Form 1120-W (you can find those IRS instructions here).
We mentioned that there are penalties for not calculating or submitting your estimated tax payments correctly and on time.
For individuals, if you owe less than $1,000 when you file your annual income tax return, you likely won’t be charged an underpayment penalty. Also, if your quarterly totals for the tax year equal at least 90% of your total tax bill, or at least 100% of the previous year’s, you also won’t likely be penalized.
For corporations, those with taxable income of less than $1,000,000 for each of the last 3 years, you won’t face penalties if your estimated tax payments are at least 100% of the smallest tax amount shown for the current or previous year.
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