s a small business owner, it can be intimidating to navigate quarterly estimated taxes. There are several regulations and rules that small business owners and freelancers alike must adhere to in order not to be penalized. Making simple mistakes like miscalculating your estimated payments or making late payments can cost you in the long run. That’s why it is necessary to ensure that you understand your state’s tax laws and regulations. Here’s everything you need to know about California’s estimated tax laws as a business owner.
What are estimated taxes?
Estimated taxes are the taxes you are expected to owe for the current tax year that you pay every quarter.
Essentially, you must pay taxes on your income as you earn it. When employed by someone else, you avoid making estimated tax payments because your employer withholds your taxes. Those who are self-employed or receive income from other means, such as dividends and earnings from stock, are required to handle regular tax payments themselves.
Does California require estimated tax payments?
The state of California does require business owners to make quarterly estimated tax payments. For those employed by others, your tax payments will most likely be deducted automatically from your paycheck and made to the California Franchise Tax Board (CA FTB), known as withholding.
However, if you are a self-employed California resident, you must file and submit your own estimated payments for the year. This applies to small business owners, independent contractors, and freelancers.
Who has to pay California estimated taxes?
In general, you are required to file a California income tax return if:
- You are a U.S. citizen or resident
- You are a part-year resident who received income from the state within the year
- You are a nonresident with a California source of income
- You are required to file a federal tax return with the IRS
In addition, the California Franchise Tax Board requires you to make estimated tax payments if you perceive your tax liability to be $500 or higher. This amount is reduced to $250 for those who are married or registered domestic partners (RDP) but choose to file their taxes separately.
Keep in mind that if you are just starting your business and are not generating any income yet, you will not be required to pay an estimated tax until there is income.
How to calculate estimated tax payments in California
Calculating your estimated tax payments can be difficult, especially if this is your first time as a freelancer or business owner. The most important thing to know is that you must estimate how much money you intend to earn in a calendar year and then deduct all relevant deductions and tax credits. That then leaves you with the value of your taxable income, allowing you to determine the amount of tax that will be due over the course of the year.
According to the California Franchise Tax Board, you can calculate your payable tax as either 90% of the anticipated current year’s tax or 100% of the prior year’s tax, including Alternative Minimum Tax (AMT). You will use the FTB Form 540-ES to complete these payments. Form 540-ES also includes the California Estimated Tax Worksheet, which helps you more accurately determine what you owe on your estimated taxes.
If you fall into the category of a high-income earner, you will be required to abide by different standards regarding your adjusted gross income (AGI). For example, if your AGI for the current year is higher than $150,000 but below $1,000,000, you have to pay 110% of the prior taxable year’s amount to avoid a penalty.
Estimated tax payment due dates in 2022 and 2023
California estimated tax payments are due in four quarterly amounts. Note also that California has concrete percentages of your yearly estimated taxes due each quarter. The following four due dates are imperative to note as a California resident that is required to pay estimated taxes:
- 1st payment; 30% due (January 1 to March 31): Due April 18
- 2nd payment; 40% due (April 1 to May 31): Due June 15
- 3rd payment; 0% due (June 1 to August 31): Due September 15
- 4th payment; 30% due (September 1 to December 31): Due January 17, 2023 (following year)
As you can see above, you do not have to pay any of your California estimated taxes in the third quarter. Use this time to catch up on your future tax payments.
How do you pay estimated tax payments?
Estates, Trustees, and fiduciaries are not required to file electronic payments. However, individuals must use electronic payments if the estimated tax or extension tax payment exceeds $20,000 or if they file an original return with a tax liability exceeding $80,000.
If you fall into either of the above circumstances, you must make all your tax payments online at www.ftb.ca.gov. If you fail to do so, you will be penalized with a 1% noncompliance penalty. The CA FTB grants four different electronic payment options to complete your California estimated tax payments. These include:
- Web pay
- Electronic funds withdrawal (EFW) for individuals using tax prep software
- Credit card
- Viv phone through California’s EFT vendor
In the case that you do not qualify for FTB’s e-pay, you will be required to submit your state tax by mail to the following address:
Franchise Tax Board
PO Box 942867
Sacramento, CA 94267-0008
If you choose to pay your California estimate tax in the mail, you will fill out Form 540-ES for Estimated Tax for Individuals and write a check or money order to the Franchise Tax Board. Do not forget to include your Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) on your paperwork.
Additionally, each estimated tax installment payment uses a separate Form 540-ES, so it is essential to ensure you are working with the right one each time. You can quickly achieve this by confirming the payment due date listed in the top margin on each form that solidifies which installment it is used for.
What is the Penalty for not paying California estimated tax?
Failure to pay your estimated taxes will result in an “underpayment penalty.” This penalty occurs if you do not pay at least 90 percent of the taxes you owe for the tax year or at least 100 percent of the tax you paid last year. If you are considered a high-income taxpayer, the government will penalize you with a 3 percent underpayment penalty if you don’t pay at least 110% of your last year's tax.
Are there exceptions or waivers to underpayment penalties?
There are exceptions, special circumstances, and ways you can get a penalty waived. You will not be penalized if you owe less than $1,000 to the IRS or $500 to the FTB after deducting your tax credits and estimated payments. Under certain circumstances, you can file form 2210 to request a waiver. Some examples that qualify you could be that your marital status changed, you misinterpreted your estimated taxes and made a significant overpayment, or you unexpectedly generated a much larger income towards the end of the year.
How Novo can simplify estimated taxes for small business owners
As always, Novo serves to simplify small business owners’ processes, especially when it comes to financial tasks. There are many benefits to opening a bank account with Novo that will not only significantly aid in keeping track of your business funds but especially help you prepare for making estimated tax payments. The following are just a few of Novo’s interfaces that help small business owners and entrepreneurs:
Novo checking account: It’s essential to separate your business finances from your personal finances for a smoother tax season. With a Novo checking account, you can put all your business expenses on your business debit card. Your business income will be paid to your business checking account, at which point you can pay yourself. You can also make an ACH payment or mail a check to the IRS straight from the app with no fees.
Novo Reserves: Automatically set aside money for tax season, so you’re not searching for money at the last minute to cover your tax payments. With our Reserves feature, you can set up an automatic transfer into your tax Reserve each time you get paid to allocate money towards tax time.
Automatic expense categorization: To make your bookkeeping tasks more manageable, Novo’s automatic expense categorization feature helps you organize your business expenses to identify what to deduct faster. You’ll see exactly how much was spent on different categories such as transportation or food.
Calculating and paying your estimated taxes can seem like a pain when doing it as an individual business owner. However, there are always ways to combat the stress and maintain your organization. Make sure you correctly understand how to calculate your estimated taxes. You must always pay at least 90% of your last year’s tax liability. Remember that you can make payments early. Finally, take advantage of calendar reminders to keep you on track. It is never wrong to ask for help and consult with your accountant, tax professionals, or CPAs to ensure you are doing the right thing at tax time.