A small business client of ours was complaining about why he needs to pay a lot of tax on April 15 and what is the estimated tax penalty. However, if you are self-employed, you should be familiar with making estimated state and federal tax payment each quarter, if you are not, you will end up a lot of tax on the tax deadline and estimated tax penalty.
The reason it is called “estimated tax” because you are estimating how much income you will make this year and paying tax on that account. If you paid extra estimated tax on each quarter, you will receive a tax refund or tax credit to apply to next year’s estimated tax.
Who should make quarterly tax payments?
If you are going to file your tax return as a sole proprietor, a partnership, S corporation shareholder, and/or a self-employed individual, you’ll generally need to make estimated quarterly tax payments if you will owe taxes of $1,000 or more.
C-corporation generally needs to make the estimated payment if they expect to owe $500 or more in tax for the year. Furthermore, if you fall into any of these categories, then you will likely have to file estimated quarterly taxes.
If you meet three very specific conditions below, then you do not have to pay estimated quarterly taxes:
1. You did not owe any taxes in the previous year and did not have to file a tax return
2. You were a U.S citizen or resident for the entire year
3. Your tax year was 12 months long.
When are estimated taxes due?
· For the period Jan 1 to March 31: April 15
· For the period April 1 to May 31: June 17
· For the period June 1 to August 31: September 16
· For the period September 1 to December 31: January 15 of the following year
How to calculate estimated quarterly taxes
Every accountant has his/her own way to calculate estimated quarterly taxes for their clients. Some use the revenue and expense for the first quarter to calculate the estimated tax for the rest of the year. Some use the last quarter from last year to calculate the estimated tax. Next, I would like to share my way to calculate the estimated tax for my clients.
I would use the last year financial situation as reference for estimated tax. Assume the revenue and expense will be similar for the next year, and then I talk to the business owners for any major change in the upcoming year. Finally, if there is any major change happened around or after the first of two quarters, I would change the estimated taxes to either higher or lower reflect the business current financial situation.
How to pay estimated quarterly taxes
After you calculated the estimated tax payment, you can simply just fill out form 1040-ES and mail it along with a check to the IRS office closest to you. Also, you can pay electronically.
The IRS’s Direct Pay system and the U.S. Treasury’s Electronic Federal Tax Payment System, for example, let you pay directly from your bank account for free. Paying with a credit card carries of fee of around 2%.
For corporations, payments must be filed through the Electronic Federal Tax Payment System.
Avoid estimated tax penalties
When you file your annual tax return, the IRS may impose penalties on quarterly tax payment for a few reasons:
1. Not paying on time
2. Not paying enough estimated tax for the year/ underestimated of your tax (For example, you are supposed to pay $100 in taxes, but you intentionally only paid $10 in estimated taxes, so you are not paying enough)