How to Do Estimated Tax Payments for Small Business

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How to Do Estimated Tax Payments for Small
Business
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• If youre a sole proprietor, LLC owner or
  partner, you need to know about quarterly
  estimated tax payments. Thats because you pay
  both your business and personal income tax
  through one personal tax return, so you are
  subject to the rules governing anyone who is not
  an employee of someone elses business.

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• Employees have payroll taxes withheld from their
  paychecks throughout the year, so the government
  always has money coming in. Youre not receiving
  a paycheck from another company, so the
  government gets nothing until you write them a
  check. Hence the estimated quarterly tax payment
  system.

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• Under this system, you pay a portion of your
  taxes every quarter in January, April, June and
  September. That amount must include
  self-employment tax (Social Security and Medicare
  taxes) as well as income tax.

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IRS Form 1040-ES

• This is the form used for filing estimated
  income tax. You will send one along with each tax
  payment you mail.

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Exception

• You dont need to pay estimated tax if you had
  no tax liability for the previous year, you were
  a U.S. citizen or resident for the whole year,
  and your prior tax year covered a 12-month period.

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Decide on a Percentage

• The IRS requires that the total of those four
  payments be at least 90 of the tax for the
  current year, or 100 of the tax shown on the
  return for the previous year, whichever is
  smaller.

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• Depending on your situation, it may be smarter
  to pay more than 90, rather than risk
  underpayment penalties.
• Pay 90 if you expect your income this year to be
  less than last year

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• Pay 100 if you expect your income this year to
  be the same or more than last year
• Pay 110 if last years adjusted gross income was
  more than 150,000 (75,000 if you were married
  and filed a separate return)

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Estimate Your Income

• A good starting point is your income tax returns
  for the last two or three years.
• If this is your first year in business, or you
  expect income to be significantly different from
  previous years, start with your year-to-date
  income and project it to a total for the year.

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• Remember, this estimate must also include other
  personal income such as interest, dividends,
  capital gains (i.e. from sale of stocks or other
  assets) and taxable alimony.

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Calculate Your Tax

• Form 1040-ES includes a worksheet for
  calculating the quarterly tax payment. Youll
  fill in your estimated income as well as any
  credits and deductions youre entitled to. It
  also offers help with figuring the differences
  between last years and this years income.

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Plan a Payment Schedule

• Youre required to complete the quarters
  payment by the IRSs mandated dates. However, you
  dont have to send it all in a lump sum. You may
  choose to make weekly, biweekly or monthly
  payments, if that works better with your cash
  flow.

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• You can also choose to pay your estimated tax
  for the entire year in one lump sum by April 15
  of the current year. (You will still have to file
  a tax return next April with the actual figures
  for the year, and either make an additional
  payment or receive a refund depending on the
  difference between your estimated and actual
  tax.)

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• Also, theres no rule that you have to divide
  the tax equally between the quarterly payments.
  If you typically do most of your business in the
  4th quarter, it would be easier to determine a
  smaller amount for the first three payments, and
  a larger amount for the last one.

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• We hope youve found this overview helpful.
  However, it is not intended to be specific tax
  advice. Please work with your Xendoo tax
  professional to decide on the best tax strategy
  for you and your business.