The annual tax season brings a sense of urgency and stress as the mid-April deadline looms, with business owners compiling their returns, determining their deductions, and ensuring they have adequate funds for the IRS. With nearly 213.4 million returns filed in 2022, the IRS understands the enormity of this task; to mitigate this burden, it requires quarterly estimated tax payments, helping businesses distribute their tax liabilities across the year and ease financial strain.
Below, small business owners can learn the estimated tax payment process and what these incremental payments mean for the fiscal year.
[Read more: A Complete Guide to Filing Your Business Taxes]
What are estimated tax payments?
Estimated tax payments are taxes that must be paid as your business earns and receives income during the year.
In 2024, estimated tax payments are due quarterly according to the following schedule:
- Quarter 1, January 1 to March 31: Payment is due by April 15.
- Quarter 2, April 1 to May 31: Payment is due by June 15.
- Quarter 3, June 1 to August 31: Payment is due by September 16.
- Quarter 4, September 1 to December 31: Payment is due by January 15, 2025.
To make your estimated tax payment, you will file either Form 1040-ES (for sole proprietors, partners, and S corp shareholders) or Form 1120-W (for corporations).
[Read more: 5 Types of Tax Forms Every Small Business Owner Should Know ]
Who has to make estimated tax payments?
Whether or not you have to make estimated tax payments depends on if you have untaxed income. Per the IRS, U.S. citizens and resident aliens who did not owe taxes in the previous year do not have to pay estimated taxes, nor do W-2 employees whose employers withheld the proper amount to cover their tax bill.
However, independent contractors who owe more than $1,000 in taxes, along with W-2 workers with insufficient withholding from their salaries, must pay estimated taxes. Sole proprietors, partners, and S corporation shareholders also have to make estimated tax payments if they expect to owe $1,000 or more on their tax return; the same is true for corporations that expect to owe $500 or more.
In some instances, those with an investment or rental income are required to pay estimated quarterly taxes as well, though it depends on whether the entire amount owed is covered by withholdings on their regular paychecks.
Don’t forget state and local taxes
Many states also require that you file quarterly estimated payments in addition to your federal taxes. These may include state and/or local income taxes, sales and use taxes (if a business sells goods or taxable services), gross receipts taxes, and employment taxes.
Determining your state and local tax responsibilities depends on the business’s structure and how it operates — for example, some states impose an additional tax on franchises. Your responsibilities will also vary based on your business's location and whether it operates in more than one state. Multi-state businesses are likely to owe taxes in each state they operate in; however, factors including the location of a business’s inventory, employees, sales, and the owner’s time spent in different states can affect tax obligations.
You may inadvertently forget a quarterly deadline; if that happens, make your quarterly payment as soon as possible.
How to calculate estimated tax payments
How much you pay each quarter depends on your income. Broadly speaking, there are two ways to calculate your estimated quarterly tax payments: by estimating based on the previous year’s taxes or by annualizing.
The former approach applies to businesses that receive income predictably or consistently throughout the year. If your income is relatively stable, calculate the year’s worth of estimated income and deductions, including expected income and self-employment tax, to determine the total amount of taxes you will owe, then divide that amount into four even payments.
The latter approach applies to seasonal businesses or freelancers whose income may vary throughout the year. Calculate what you owe each quarter based on what you’ve actually earned and spent during that year, accounting for any deductions you will claim along with income and self-employment tax, then divide the total into quarterly payments.
Your estimate may be slightly off, meaning you will underpay or overpay on a quarterly payment. Generally, you can correct this discrepancy on the next quarter’s payment without any issues.
[Read more: Everything You Need to Know About Your Seasonal Business Taxes]
Can I skip estimated taxes?
In short: no. It’s a bad idea to skip estimated tax payments, as you may incur an underpayment of estimated tax penalty — the exception being if you’ve already paid enough with your previous payments. Interest is charged on penalties, and it will continue to increase your due amount until fully paid.
Per the IRS, penalties for corporations can be avoided by paying the correct amount owed on time, and they can be reduced or removed in the following situations:
- If you owe less than $500 in total tax.
- If you can provide evidence, such as canceled checks or other documents listing amounts and dates, of estimated tax payments.
- If you are part of a consolidated group that is calculating its first payment based on the tax amount of the previous year.
Circumstances for a waived penalty for individuals include failure to pay due to an unexpected event such as a casualty, disaster, or some other extraordinary situation, making it unfair to enforce the penalty, or due to retirement (after turning age 62) or suffering from a disability during the tax year when you were supposed to make estimated payments.
You may inadvertently forget a quarterly deadline; if that happens, make your quarterly payment as soon as possible. If you believe you will earn less than $1,000 ($500 for corporations) or you have overpaid the previous quarter, you may be able to skip a quarterly estimated tax payment. However, you should consult with an expert before making this decision.
Businesses that cannot pay taxes or penalties in full on time should pay off what they can afford, and then apply for a payment plan, which also provides a reduction in future penalties.
How to pay quarterly estimated taxes
There are a few ways to submit quarterly tax payments, including:
- Online: Payments can be made via a free online IRS account that provides access to payment history and tax records.
- Through the Electronic Federal Tax Payment System: The U.S. Treasury’s system allows businesses to make payments straight from a bank account. Registration is required.
- Via debit, credit, or digital wallet: This payment method incurs additional fees, which vary based on processor.
- Through the mail: Though the IRS encourages electronic methods, businesses can send payments through the mail along with a payment voucher from IRS Form 1040-ES.
Businesses can also pay by wire, check, money order, or cash at select locations approved by the IRS.
Payments can be sent in smaller, more frequent payments four times per year following the IRS schedule, or as one lump sum during the first quarterly payment. However, it's important to ensure accuracy when following an alternate schedule — inadequate coverage of your tax liability could lead to underpayment penalties.
Don’t leave anything up to chance; if you have any questions or concerns, consult with a tax professional before filing.
This article was originally written by Emily Heaslip.
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