For any ordinary American, April means tax season. However, once you are 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.
Understanding Estimated Tax
An estimated tax is a way to pay taxes on income not subjected to withholding tax. Basically, 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 be overwhelming, but if your business expenses far exceed your profits, analyzing your taxes is vital to keeping your business alive.
While the Internal Revenue Service (IRS) has plenty of resources, such as the IRS 1040ES 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:
1. Who Pays Estimated Taxes?
All businesses pocketing profits are required to pay taxes. Removing all business expenses from the 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 income subjected to those taxes. This is the criteria that determines who is required to file estimated taxes:
- 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-Proprietor 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.
- 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 can flag you to make estimated tax payments this year.
2. Who Is Exempt from Paying Estimated Taxes?
Individuals who receive salary wages can often avoid paying estimated taxes by requesting that their employers 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?
The IRS requires you to use their Form 1040-ES (Estimated Tax For Individuals) to pay estimated taxes. Using this form, you must determine the amount that you are required to pay by calculating your 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.
Break-Down of Quarterly Estimated Tax Due Dates
Quarterly estimated taxes are due in installments (April, June, September & January). The following is a break-down for each quarterly payment:
April includes two important due dates: one for your income tax and another for the first installment of your quarterly estimated taxes. In April, you are required to pay taxes on the income you earned from January through March.
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.
In September, you are required to pay taxes on the income you earned from July through September.
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.
Running a business requires all the help you can get. You now have the information you need to handle estimated taxes for your business. It’s never a bad idea to consult help, especially while starting out — a good accountant or smart software tools can play a big role in your business, not only by saving you money, but also by limiting your risk of liability.