Estimated taxes are a natural part of owning a business. The IRS wants tax payments throughout the year on all earned income, either through employer withholdings or estimated tax payments. For business owners and self employed individuals, estimated tax payments are how taxes are remitted throughout the year. As a digital marketer, you are probably familiar with estimated taxes. Here are some tips to make calculating and remitting your quarterly taxes easier.
Who Pays Estimated Taxes
As we mentioned above, estimated taxes are for business owners and self employed. They up the withholding portion of taxes as well as self employed taxes. Now, depending on how your business is structured, the requirements on who pays estimated taxes might vary.
- Estimated Taxes for S Corporations, Partnerships, and Sole Proprietorships S corporations, partnerships, and sole proprietorships are required to pay estimated taxes if they expect to owe more than $1,000 when they file taxes. In addition to making estimated tax payments to the federal government, they may also be required to make estimated tax payments to the state as well. For example: In the State of California, estimated taxes are required if the taxpayer’s AGI (adjusted gross income) is over 150K.
- Estimated Taxes for Corporations For corporations, the income tax threshold is a little lower. If the corporation is expected owe $500 in taxes, then they are required to pay estimated taxes.
Who Doesn’t Have to Pay Estimated Taxes
Sometimes the estimated tax can be bypassed if the taxpayer is also a W-2 wage earner. In this instance, the taxpayer has the option of having their employer withhold an additional amount on their paychecks to help cover the estimated taxes they would owe. In addition, if the taxpayer did not have any tax liability from the prior year, was a US citizen or resident for the entire year, and the tax year covered a full 12 month span, they may not be subject to estimated taxes.
Calculating Estimated Taxes
The process of calculating quarterly tax payments can be a little confusing for many. The easiest way to calculate the amount owed, is to pay 90% of the amount paid in taxes from the previous years taxes and divide that amount by 4 to arrive at 4 quarterly payments. Any over payments will be refunded to you by the way of a tax refund, however, if you do not want the IRS to hold on to a portion of your money for months on end, it is important to calculate the amount accurately.
It is important to adjust the amount accordingly, as sometimes income fluctuates. To avoid overpaying or underpaying, it is important to revisit your calculations. If the amount needs to be adjusted, you will need to take into account your current income, projected business expenses, and any deductions, credits, or exemptions. This is where good bookkeeping comes into play. Having the right tools and systems in place can help save time, stress, not to mention money. Many accounting software programs can assist with calculating estimated taxes.
In addition to calculating estimated taxes, self employed taxes also need to be calculated and remitted. The self employed tax makes up the taxpayers and the employers portion of social security and medicare. The current percentage for self employed tax is 15.3%, with 12.4% going towards social security, and 2.9% going towards medicare.
The IRS makes it really easy to pay them. You can send them physical payment by mail, make payments over the phone, or pay online.
Estimated taxes are due on a quarterly basis. The due dates for quarterly tax payments are as follows:
- 1st Quarter Jan. 1 – March 31: Due April 15
- 2nd Quarter April 1 – May 31: Due June 15
- 3rd Quarter June 1 – Aug. 31: Due Sept. 15
- 4th Quarter Sept. 1 – Dec. 31: Due Jan. 1
It is important to note that the due date is always the 15th business day of the month. Meaning that in the event that the 15th falls on a weekend or holiday, the due date is moved to the following business day.
Underpayment/Failure to Pay Penalties
Failure to pay quarterly tax payments, will result in a penalty from the IRS. Likewise, underpayment can also be susceptible to penalties from the IRS. If a taxpayer fails to remit quarterly tax payments, the IRS typically imposes a penalty in the way of an interest charge of 6%. For taxpayers who have paid their estimated taxes, but underpaid, the IRS will now waive the penalty, if at least 85% of their tax liability has been paid. This is down from 90% from previous years.
Working with an tax advisor can help you when it comes time to calculate quarterly tax payments. If you are concerned about overpaying, underpaying, or paying on time, it may be time to ask your tax advisor for some guidance, especially if this is your first year paying estimated taxes. If you have questions about estimated taxes reach out to our partner site Tax Hack Accounting Group, who specialize in assisting digital marketers with their accounting and tax preparation.