For the average American, April means tax season. However, once you start running a business, your new calendar will include plenty of new deadlines for keeping up with taxes. Whether you are searching for answers to better your business or simply looking to learn more about the topic of estimated tax, we suggest that you keep reading this tax guide.
Understanding Estimated Tax
An estimated tax is a way to pay taxes on income not subject to withholding tax. Essentially, estimated tax applies to income sources through business, rent, interest, and dividends received, self-employment, etc. The pressure of determining your estimated taxes for your first year of business can feel daunting, but if your business expenses far exceed your profits, determining your taxes owedis vital to keeping your business on the right legal footing. On top of quarterly estimated taxes, other taxes you might pay are Social Security taxes and Medicare taxes.
While the Internal Revenue Service (IRS) has plenty of resources, such as the IRS 1040 ES Estimated Tax Form, trying to understand the information within their guides is a complex and grueling task. Here is everything you need to know about estimated taxes for your business:
Who Pays Estimated Taxes?
All businesses making profits are required to pay taxes. Removing all business expenses from income determines a company’s overall profitability. This income includes external revenue sources such as grants, food stamps, and child support that you and your family may be receiving. Furthermore, the IRS requires individuals to pay their estimated taxes within the year they received the business income subject to those taxes. These are the criteria that determine who is required to complete estimated tax filings based on business structure:
- Corporations, S Corporation Shareholders, & Partners: An estimated tax payment is due for every business ownership earning. A corporation, on the other hand, must pay estimated taxes each time the business is expected to touch $500 or more in tax liability.
- Self-Employed Individuals & Sole-Proprietorship Small Business Owners: Individuals that earn an income from their business are required to make an estimated tax payment each time their tax liability increases by $1,000 for the entire year. This rule of thumb applies to both full-time and part-time businesses and includes freelancers and independent contractors.
- Tax Defaulters from the Previous Year: If you failed to pay your due taxes last year or the amount withheld from your paycheck didn’t match the amount you were expected to pay, the IRS could flag you to make estimated tax payments this year.
Who Is Exempt from Paying Estimated Taxes?
By and large, most business owners are required to pay taxes. If you receive salary wages, you can often avoid paying estimated taxes by requesting that your employer withhold additional taxes from their earnings. Anyone meeting all the following criteria can bypass estimated tax for the year:
- You have maintained the status of a U.S. citizen or resident for the entire year.
- The taxes you paid last year covered an entire 12-month period.
- You do not have any tax liabilities from the previous year.
How to Make Your Estimated Tax Payments
If you operate your business as a sole proprietorship, partnership, or S corporation, generally you will use the IRS Form 1040-ES (Estimated Tax For Individuals) worksheet to figure and pay estimated taxes. On the other hand, if you operate your business as a C corporation, you will typically use IRS Form 1120-W (Estimated Tax For Corporations) to figure and pay estimated taxes.
If you operate your business as an LLC, the forms you use to figure and pay estimated taxes depend on the number of members and the elections you make. In other words, LLCs can file estimated taxes either as an individual, a partnership, or a corporation. Single-member LLCs typically file Form 1040-ES, while LLCs filing as a partnership should file Form 1065-ES. If you’ve elected to file your LLC taxes as a corporation, you should file Form 1120 as a C corporation or 1120S as an S corporation.
With the proper IRS estimated tax worksheet, you must then determine the amount that you are required to pay by calculating your taxable income, credits, deductions, and taxes previously paid. The form is completed similarly to a yearly tax return. However, the IRS requires estimated taxes to be paid quarterly, with the payments for the entire year carefully divided into four payment periods, each with specific deadlines. Taxpayers can complete their taxes through the Electronic Federal Tax Payment System (EFTPS), available at www.irs.gov.
Breakdown of Quarterly Estimated Tax Due Dates
Quarterly estimated tax deadlines occur in installments (April, June, September & January). The following is a break-down for each quarterly payment:
- April: April includes two important due dates: one for your annual tax return, or your income tax return, and another for the first installment of your quarterly estimated tax payments. In April, you are required to pay taxes on the income you earned in your first quarter from January through March.
- June: In June, you are required to pay taxes on the income you earned from April through June. Since the deadline for this quarter falls in the middle of the month, we recommend that you pay careful attention to the expenses and profits made during that period.
- September: In September, you are required to pay taxes on the income you earned from July through September.
- January: In January, you are required to pay taxes on the income you earned from October through December of the previous year. It is important to note that profits made or expenses accrued during the New Year should not be included in your calculation for this quarter.
Should you hire help for your small business taxes?
Running a business requires all the help you can get. It’s never a bad idea to consult a tax professional for tax preparation help, especially while starting out. A good accountant or smart tax software tools can play a big role long-term, not only by saving you time and money through knowledge of tax rates and tax deductions but also by limiting your risk of liability.
If you don’t already, be sure to keep your business and personal finances separate. This is a key way to set up you and your business for success as you file estimated taxes each quarter. Learn more about Novo business checking.
While quarterly business taxes can seem daunting at first, they don’t need to be a long-term source of stress, as you run your small business. Follow these steps and be mindful of keeping your business finances organized and separate from your personal finances, and you’ll be successful in filing taxes each quarter.
This page is for informational purposes only and is not intended to be relied upon as legal, financial, or accounting advice. Please consult your own professional if you have any questions.