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Estimated Tax Payments for Small Business Owners

By: Bill Wortman

 

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As a small business owner, you follow a different set of tax rules than your employees. Making estimated tax payments throughout the year is required and should be handled in a way that’s not particularly burdensome. If you recently left your previous job to start your own business, then you will have to get used to the change. At your previous job, did you ever wonder why your employer consistently held a portion of your paycheck for taxes and how that amount was determined? Estimated tax payments should be paid by small businesses throughout the year, and it is the responsibility of the owner to make these payments to the IRS and the state. Business TypeOf course, the rules for estimated tax payments vary depending on business type.If you elect to be taxed as a sole proprietorship, S Corporation, or partnership: As a general rule, you should expect to make estimated tax payments to the IRS and state government if you expect to owe $1,000 or more in taxes by the end of the year. An exception applies to businesses whose withholdings and tax credits add up to at least as much as their taxes in the year prior. If you elect to be taxed as a C Corporation: You will need to make estimated tax payments if you expect to owe $500 or more in taxes for the year. Payment AmountFor businesses that are earning about the same profits as the previous year, they can elect to pay the same amount as the previous year in estimated payments. Otherwise, they may base the amount on their current growth rate and the amount earned in the previous quarter.Although IRS will not scrutinize your method of calculating estimated tax payments, it is best to avoid under or over payments. In addition to penalties imposed for under-payments, no business wants the surprise of a steep bill at tax time. Over-payments may limit your cash supply to an unhealthy level for your growing business. Tax professionals should be consulted for specific advice and help calculating estimated tax payments for your small business.Payment Methods If a self-employed individual, a single-member LLC, a partnership or an S Corporation shareholder, employers should fill out Form 1040-ES and mail in the blank vouchers provided with the form. Otherwise, the Electronic Federal Tax Payment System (EFTPS) can be used to make estimated tax payments. State tax forms can be found through your state government’s website. Employers can have a third party make these payments on their behalf if they so choose.Corporations should use Form 1120-W to calculate and send their estimated tax payments. Otherwise, a third party tax professional, financial institution or payroll service can take care of this for them.Due DatesEstimated tax payments are due on four days during the year: April 15, June 15, September 15, and January 15. For corporations, estimated tax payments are due on the fifteenth day of the 4th, 6th, 9th and 12th month after the end of the company’s fiscal year.After your first year, the IRS will likely send your business estimated payment vouchers at the end of each tax year. However, businesses are still expected to make estimated tax payments whether or not they receive these vouchers.

Published: June 13, 2013
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Bill Wortman

As the Chief Business Consultant at BizCoachingOnDemand.com, Bill has over 40 years of business experience. He's held multiple executive-level positions and fulfilled the role of CFO at large, publicly-held (NYSE, NASDAQA, and AMEX) corporations. In addition, he's also been an owner of several successful private ventures in real estate and in the automotive industry.

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