The Importance of Estimated Taxes

As a small business owner, understanding and managing estimated taxes is crucial to avoid unexpected tax bills and penalties. Estimated taxes are periodic payments made to the IRS on income not subject to withholding, such as net business income, earnings from self-employment, interest, dividends, and capital gains.

 

Who Needs to Pay Estimated Taxes?

Individuals, including sole proprietors, partners, and S corporation shareholders, generally must make estimated tax payments if they expect to owe $1,000 or more in taxes when their return is filed. Corporations are required to make estimated tax payments if they expect to owe $500 or more in taxes when their return is filed.

 

Consequences of Not Paying Estimated Taxes

Failing to pay estimated taxes can result in underpayment penalties. The IRS imposes these penalties to ensure taxpayers pay taxes throughout the year. The penalty is calculated based on the amount of the underpayment, the period of underpayment, and the applicable interest rates (currently 7%)

 

Avoiding Penalties

To avoid penalties, taxpayers should ensure they meet one of the following safe harbor provisions:

  • Pay at least 90% of the current year's tax liability.
  • Pay 100% of the previous year's tax liability (110% if AGI exceeds $150,000 or $75,000 if married filing separately).

Due Dates 

Estimated tax payments are typically due in four equal installments:

  • April 15
  • June 15
  • September 15
  • January 15 of the following year

If these dates fall on a weekend or holiday, the due date is the next business day. 

 

Calculating Estimated Taxes

Estimated taxes should be calculated based on your projected adjusted gross income, taxable income, taxes, deductions, and credits for the year.  This projection should be revisited quarterly and the estimated tax amount adjusted upward or downward accordingly.  A tax planning professional can help you with these calculations.

 

Benefits of Paying Estimated Taxes

  • Avoid Penalties: Timely payments help you avoid underpayment penalties.
  • Manage Cash Flow: Regular payments prevent large tax bills at year-end.
  • Financial Planning: Helps in budgeting and financial forecasting.

Conclusion

Staying on top of estimated tax payments is essential for small business owners. Regular payments not only keep you compliant but also aid in better financial management.   Let me help you achieve your financial goals and find quick ways to save you money on taxes.  Sign up today for a free discovery call.

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