If you’ve recently opened a business, then congratulations! We are excited for you to begin this new chapter of your life. However, chances are you’ve just begun to give serious thought to your taxes and how that whole process will work. What are estimated taxes? Who has to pay them, and how do you pay them? Today, we are going to share some information from the IRS Estimated Tax Guide to help you understand what your tax obligations are as a new, small business owner.
Understanding Estimated Taxes
Instead of doing taxes annually like an employee would, the IRS and Illinois’ state treasury demand that you pay your taxes just about as quickly as you earn your income. This is why most business owners need to withhold taxes from wages or other payments. Those who do not need to do this still need to pay estimated tax payments each business quarter. Estimated tax payments are set up as sort of a pay-as-you-go system. This is your time to send the government enough of your revenue to cover the costs of both your income tax and your self-employment tax. This includes Social Security and Medicare obligations.
So what happens if you don’t pay enough taxes throughout the year? Chances are you will need to pay a penalty for underpaying on your estimated tax. However, the IRS does know the calculating your projected earnings isn’t exactly easy. Because of this, if you choose to pay at least as much as your previous year’s liability amount—or within 90 percent of what you do actually owe at the end of the year—they will not penalize you for underpayment.
Paying Estimated Taxes
Anyone who is self-employed and expects to owe more than $1,000 when they file their annual return is required to pay estimated taxes on their income. If you have not been withholding your taxes throughout the year, then you are expected to pay estimated taxes. For those of you who have a business structured as a corporation, and you expect to owe $500 when you file, you will need to pay estimated taxes. Talk to a tax attorney if you have any questions!
How Much to Pay
So you’ve figured out that you will need to start paying estimated taxes. The next issue to tackle is calculating exactly how much you will need to pay. In order to determine your payment amount, figure out your taxable income, your adjusted gross income, taxes, credits, and deductions for the year. Your business will be in a different situation than the one next door, so it is definitely worth your time and money to sit down with a professional tax advisor. They can help you find the best calculation method, which will vary depending on your business’ situation. Here are some of your options:
- Calculate quarterly: Any freelancer or contractor who might have an income that fluctuates in any way will likely have a better time calculating their taxes quarterly.
- Look at your previous return: If you have been in business for longer than a year, take a look at last year’s federal tax return. Take the income and deductions you expect to have in this year’s tax return and then examine last year’s return. Once you do the math, you should make sure your estimated payments are about 100-110 percent of what you paid last year to avoid underpaying.
- Use Form 1040-ES: This form allows you to calculate your quarterly estimated tax payment. It includes a worksheet to help you figure out how much you will owe. However, corporations should choose a Form 1120-W instead.
When to Pay
Payment periods are divided up into quarters, or four times per year. These payments are due on the 15th of April, June, September, and the following January. Do your best to pay at least the minimum by these due dates; otherwise, you may have penalties to face from the IRS. If this does happen to you, please contact the team here at Tax Law Offices. We will do our best to help!
How to Pay Estimated Taxes
The good news is, payment is easy! Those of you who are filing as self-employed, use Form 1040-ES. This includes quarterly payment vouchers you can send in with your payment. Those of you who own corporations can deposit payment electronically. The IRS will send you vouchers at the end of the tax year, so there is no need to stress about downloading the latest forms.
If you are in need of an IRS tax attorney, it’s time to give our office a call. Tax Law Offices is here to help you navigate your case and do our part to defend you against the IRS. Please reach out now to schedule a free consultation! We look forward to hearing from you.