As the owner or shareholder of a startup company or any company, there are many challenges and opportunities you will face on the path to corporate success. Building the company while also managing the sales, marketing, accounting, and IT aspects of your organization will keep you very busy, oftentimes overwhelmed. Most small business owners are not surprised by the time demands and required involvement in multiple areas of the company. However, many are surprised by various compensation strategies available and the resulting tax consequences. When an owner receives income such as distributions or other “non-payroll” income, there are key tax considerations. One such consideration is estimated tax payments, which is required by the IRS throughout the year. To help clients, prospects, and others better understand estimated tax payments for business owners, see a summary of key details below.
Who Needs to Pay Estimated Taxes?
Several situations may mandate individuals to make estimated tax payments. This includes sole proprietors, partners, and shareholders in S-Corporations who expect to owe taxes of $1,000 or greater when their tax return is filed. The IRS asserts that C-Corporations need to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed, using a required electronic fund transfer.
Calculating Estimated Tax Payments
To determine your estimated tax, you will need to calculate expected AGI (adjusted gross income), taxable income, taxes, deductions, and credits for the year ahead of time. A good place to start is with your prior year’s tax return as it will provide the most reliable financial information as a basis. Note that you can also use IRS Form 1040-ES to make the calculation as well. While some are inclined to make this calculation themselves, there is value to engaging an accountant. An accountant’s familiarity with rules and regulations leaves less room for error.
Penalties are generally assessed when a taxpayer fails to make an estimated payment, pays less than required, or makes an overdue payment. Most taxpayers can avoid this penalty if they owe less than $1,000 in total taxes or have paid at least 90% of taxes owed for the current year. Note that penalties are based on the lesser of 90% of the amount of total tax due for the current year or 100% of the amount of tax paid in the previous year. In the case of an individual with adjusted gross income in excess of $150,000 or for a married individual filing separately with adjusted gross income in excess of $75,000, penalties would be based on the lesser of 90% of the amount of total tax due for the current year or 110% of the amount of tax paid in the previous year. The IRS follows a separate set of penalty guidelines for farmers and fisherman.
A penalty can be waived if the failure to make an estimated payment was the result of a natural disaster (hurricanes, tornadoes, earthquakes, flooding, etc.) or if the taxpayer is of retirement age and could not make payments due to becoming disabled.
Estimated Tax Due Dates
For most taxpayers, estimated tax payments are due on a quarterly basis and need to be remitted on or before specified dates. For income earned between January 1 and March 31 the deadline is April 15, income earned between April 1 and May 31 the deadline is June 15, income earned between June 1 and August 31 the deadline is September 15, and income earned between September 1 and December 31 the deadline is January 15 of the following year.
The IRS offers many ways for a taxpayer to make their estimated tax payments, including applying credits from a previous year return, direct deposit from a bank account, debit or credit using pay by phone, or mailing a check with a payment voucher from Form 1040-ES.
Estimated tax payments are a regular part of life for many business owners. If you are interested in learning more about estimated tax payments or would like assistance with tax planning, Selden Fox can help. For additional information please call us at 630.954.1400, or click here to email us. We look forward to speaking with you soon.