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Guide to Estimated Tax Payments
How to handle your year-round relationship with the IRS
Estimated taxes are just what the name indicates. You estimate what your company's income will be and then send taxes on that amount to the IRS. Generally, you have to file these payments in equal installments. But some businesses, especially those that make the bulk of their income in particular quarters, might benefit from paying precisely what they owe each quarter instead of equalizing the estimated payments in four installments.
To make sure you meet your estimated tax requirements, you need to
- Understand the estimated tax requirements
- File the right forms
- Determine how to pay
Action Steps
The best contacts and resources to help you get it done
Know the rules
Estimated taxes are due on specific dates. If you don't make a profit, you don't owe estimated taxes. As with all tax matters, details count.
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Estimated tax basics are laid out at the Internal Revenue Service's Web page on the topic for small businesses and the self-employed. Want something written a little more comprehensibly? Check out TurboTax's estimated taxes FAQ or Yahoo Small Business' article on paying them. Each of these sites, however, discusses estimated taxes as they apply to sole proprietorships. Requirements for more formalized businesses (C and subchapter S corps) are a bit different. If that's your situation, see IRS Publication 542, Corporations for filing details.
Business structure matters
When and how you pay your estimated taxes depends on your business structure. The timing, paperwork and even the threshold amount used to determine whether you need to file them at all differs if you're a sole proprietor or partnership rather than a corporation.
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Individuals and sole proprietors file Form 1040-ES, sending the IRS one voucher and payment each April 15, June 15, Sept. 15 and Jan. 15 (or the next business day when those dates fall on a weekend or holiday). Corporate estimated taxes also are due four times a year, but since some companies operate on fiscal rather than calendar years, the IRS requires the payments via Form 1120-W on the 15th of the fourth, sixth, ninth and twelfth month of the business' tax year. If you use computer software, such as TurboTax for Business, these added forms are included.
Pay up
Increasingly, the IRS is encouraging, and sometimes forcing, businesses to do business with the agency electronically. That applies to filing tax forms as well as paying what's owed.
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The software program you use will help you e-file forms. For basics on e-filing options for business and self-employed taxpayers, check out the IRS Web pages for small business and self-employed taxpayers, as well as the one for large and mid-sized corporations. The agency doesn't yet accept 1120-Ws electronically, but does take 1040-ES payments. If you use the agency's Electronic Federal Tax Payment System (EFTPS) to send in your estimated payment, you don't even have to file a form, just pay. For more on business tax e-payments, check out the EFTPS FAQ.
Tips & Tactics
Helpful advice for making the most of this Guide- Run your company's income figures periodically throughout the year so you won't be surprised by a big tax bill.
- Complete the estimated tax worksheet you'll find in Form 1040-ES to get an idea of whether you'll face a possible underpayment penalty.
- If your company's income is relatively steady throughout the year, file using the regular estimated tax method, where you figure your overall estimated tax amount and pay it in four equal installments.
- Does your business encounter a sharp rise in income during a particular quarter? Then examine whether it's worthwhile to file using the annualized income installment method, where you pay estimated taxes based on the actual income for the applicable quarter.
- If you're a sole proprietor with a salaried job in addition to your business, you can increase your withholding amounts at your wage-paying job to cover any business underpayments.
- Withholding adjustments also work if your spouse has a job where payroll taxes are collected and you file a joint return. He or she can file a new W-4 to have more taxes withheld to cover your business liabilities.
