Estimated Taxes for Small Businesses
Estimated Tax is the method used by the IRS to collect taxes on income that is not subject to withholding, such as income from self-employment, interest, dividends, rent, gains from the sale of assets, prizes, and awards. For small businesses, this applies if you operate as a sole proprietor, limited liability company, or receive dividends as a shareholder in a Subchapter S corporation at the point where you owe $1,000 or more in federal taxes. Payments are based on your entire adjusted gross income, including deductions and credits, plus your spouse’s income if you file jointly. Taxpayers are required to remit Estimated Taxes to the IRS on a quarterly basis. These funds pay income tax and other taxes such as self-employment taxes (Social Security and Medicare) and alternative minimum tax (AMT). Just like regular payroll tax deductions from a paycheck, the IRS requires all taxes to be paid on a “pay as you go” basis, as the income is earned. Taxpayers must generally pay at least 90% of their taxes throughout the year by way of withholding, estimated or additional tax payments, or a combination of the two. Not paying or underpaying Estimated Taxes may result in a penalty.
If you have other wage or salaried employment besides your business, you may be able to avoid Estimated Taxes by filing a new Form W-4 with your employer to increase your withholding to cover the extra income. The IRS has a Tax Withholding Estimator that can help calculate how much tax to withhold from your paycheck. The only other exception to the “pay as you go” program occurs If you had no tax liability for the prior year, were a U.S. citizen or resident for that whole year, AND your prior tax year covered a 12-month period. You will, however, still be required to pay-up at the end of the year.
What’s Your Estimated Tax?
To figure your Estimated Tax, you need to estimate your annual Adjusted Gross Income for the year along with expected deductions and credits. Use your 2021 tax return as a guide. The worksheet included in Form 1040-ES can be used to calculate the amount of your quarterly payments. More detailed information and worksheets can be found in IRS Publication 505. Self-employment taxes (Social Security and Medicare) amount to 15.3% for most taxpayers. Depending on your income and filing status, you may be responsible for paying an additional 0.9% in Medicare taxes if you are in a higher income bracket. Income taxes must be estimated from your earnings. Self-employed individuals do receive a 50% deduction in their Social Security and Medicare taxes to compensate for the share of these taxes that would typically be paid by an employer. That deduction is written into the formulas on the worksheet.
If you find that your earnings were either higher or lower than you originally estimated for the previous quarter, complete another 1040-ES worksheet and recalculate your estimated tax amount for the next quarter. This method is particularly helpful for taxpayers who earn income unevenly during the year. In this situation, the taxpayer can make unequal tax payments, based on when they receive their income, rather than four equal payments.
For 2022, Estimated Tax payments are due on 4/18/2022, 6/15/2022, 9/15/2022 and 1/17/2023. You can pay by check through the mail, online, and by phone or mobile device. They accept credit card payments. IRS Publication 505 Includes detailed instructions for payment.
Help is Available
NOTE: This article is intended as a general introduction to Estimated Taxes. For advice relating to your specific situation, consult IRS Publication 505 and your accountant. Estimated tax requirements are different for farmers, fishermen, and certain high income taxpayers.
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About the Author: Cindy has been helping Wyoming entrepreneurs start or improve their businesses for the past 17 years. An entrepreneur herself, she thrives on the challenge of understanding each new business and business owner and helping them to succeed. Currently the owner of several rental properties, she has owned a number of other small businesses, including a want ad newspaper, a secretarial service, and a stained glass studio.