Estimated taxes: penalties and requirements

income-tax-491626_640Do you have to pay estimated taxes?

Avoid penalties by being aware of requirements

By Debora D. Peters

Estimated taxes can be a confusing topic for new business owners. Typically, all business owners who make a profit in their business are required to pay estimated taxes. If you are a sole proprietor, partner in a partnership, S corporation shareholder or member of a limited liability company, you are required to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your federal return.

How do you figure your estimated tax payment

This too can seem incredibly overwhelming if you are calculating your estimated payments on your own.

There are resources that can be found online to help you estimate what you will owe from the estimated profits of your business. A good starting point is reviewing the return from your prior year and using the deductions to make adjustments.

Estimated tax payments are divided into four payment periods.

First quarter (Jan. 1 to March 31): Estimated payment due April 15

Second quarter (April 1 to May 31): Estimated payment due June 15

Third quarter (June 1 to Aug. 31): Estimated payment due Sept. 15

Fourth quarter (Sept. 1 to Dec. 31): Estimated payment due Jan. 15

How to pay your estimated taxes

You can log on to the Internal Revenue Service’s website at www.irs.gov and search for the 1040-ES form, then complete a voucher and mail a check. Another option is to make an electronic payment through the Electronic Federal Tax Payment System after you’ve enrolled. You can also go directly to: directpay.irs.gov and make payments through an electronic transfer of funds from your bank account.

If you fail to make the required estimated tax payment you may have to pay a penalty for the underpayment of estimated taxes. You can avoid paying the penalty if you owe less than $1,000 in tax after subtracting all of your withholdings and credits, or if you paid at least 90% of the tax in the current year, or 100% of the tax on the return for the prior year, whichever is smaller.

Taxes can be overwhelming and confusing. I would recommend finding an enrolled agent or certified public accountant that you feel comfortable with and seeking professional guidance to ensure that you are prepared and not shocked or surprised when April rolls around.

An enrolled agent is authorized by the U.S. Department of the Treasury to represent taxpayers before the Internal Revenue Service for audits, collections and appeals. Enrolled agents advise, represent and prepare tax returns for individuals’ partnerships, corporations, estates, trusts and any entities with tax reporting requirements.

Debora D. Peters, of Peters Tax Solutions LLP, is an accredited tax preparer who has represented hundreds of clients under federal and state audits. She obtained her Enrolled Agents License in 2009. Her website (www.peterstaxsolutions.com) includes a resource for estimating tax liabilities.

 

 

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