Estimated tax is the method used to pay tax on income that isn’t subject lo withholding, most notably earnings from self-employment. Many owners of small businesses whether operated as S corporations, partnerships, limited liability companies electing partnership taxation, or sole proprietorships—pay their estimated lax using the same IRS Form 1040-ES that individuals use.
Payments of estimated taxes are spread out over four payments, falling due in April. June, and September of the current year, and January of the following year. Generally a taxpayer must file estimated taxes if he or she owes S1.000 or more in taxes when an annual lax return is tiled. An underpayment penally can be avoided if tax payments for the year, including withholding and any tax credits, cover the ultimate tax bill, oral least are short by less than $1,000. There are special rules for farmers, fishermen, certain household employers, and some higher-income taxpayers.
A taxpayer who also receives salaries and w ages may be able to avoid having to make estimated lax payments on other income by asking his or her employer to take out more lax from such earnings. In addition, in a given year a taxpayer does not have to make estimated tax payments until there is income on which income tax will be owed.
Given the difficulty in anticipating the year’s total tax obligation in April, or even June, there are two “safe harbors” for avoiding a penalty for underpayment of estimated taxes: Pay either 90% of your current year’s tax obligation or 100% of the previous year’s tax.
Corporations are subject lo similar, but slightly different, rules for paying estimated taxes. A corporation must make equal installment payments on the 15th day of the 4th. 6th, 9th, and 12th months of its tax year if the expected lax for the year is S500 or more. Corporations use IRS Form 1120-W. The sale harbors for corporate taxpayers are each set at 100%. Accordingly, to avoid a penally, a company should make each payment at least 25% of the current sear’s income lax or 25% of the prior year’s income tax. whichever is smaller.
