Many businesses and individuals must make estimated federal income tax payments. Your tax preparer might have told you that you need to make these payments, or maybe you have a lot of business income and realized you must pay taxes on them.
The IRS extended the tax filing deadline from April 15 to May 17, 2021 in response to the ongoing coronavirus pandemic, but it has stated that this does not apply to 2021 estimated payments that are due on April 15, 2021.
Making Quarterly Estimated Tax Payments
You might have to pay estimated taxes, depending on how much you owe and on your business type. Most small business owners don't receive paychecks, so income taxes and taxes for Social Security and Medicare aren't withheld from their pay. The IRS requires that taxes be paid throughout the year, and estimated taxes are the way to make these payments when they're not withheld.
The amount of estimated tax must be calculated to include:
- The amount of income you made from the business during a year, and
- The amount of self-employment tax (Social Security and Medicare) you owe based on that income.
Estimated Taxes for Business Types
Your business tax is calculated on Schedule C - Profit or Loss for Business if your business is a sole proprietorship or a single-member LLC, which is included with your personal Form 1040 tax return.
Your share of the profits of the business is shown on a Schedule K-1 (Form 1065) if your business is a partnership, a multiple-member LLC, or an S corporation. This schedule is also included with your personal tax return when you file.
What's the Rule for Making Estimated Tax Payments?
Look at your income from all sources, including your business, on your personal tax return. Include self-employment tax, then look at the tax due. The IRS says you must estimate taxes if both of the following apply:
- You expect to owe at least $1,000 in tax for this calendar year after subtracting your withholding and tax credits, and
- You expect your withholding and credits to be less than the smaller of 90% of the tax to be shown on your tax return or 100% of the tax shown on last year's income tax return
- Your tax return for last year must cover all 12 months.
Corporations (the businesses, not the owners) must make estimated tax payments if the tax due is $500 or more for the year.
How Do I Calculate Estimated Tax Payments?
Keep the above numbers in mind as you and your tax preparer work on your business tax return.
- You can estimate your taxes using the estimated tax worksheet in Publication 505: Withholding and Estimated Tax if you're a sole proprietor, partner, or S corporation shareholder.
- Use Form 1120-W to estimate the taxes you owe if you're a corporation.
Don't forget to include self-employment tax in your calculations. You can use the Self-Employment Tax Worksheet (page 6) of Form 1040-ES Instructions to estimate your self-employment tax for the year.
What Are the Due Dates for Estimated Tax Payments?
Due dates for estimated taxes are based on when the income was received:
- April 15 for income received for the period January 1 through March 31
- June 15 for income received for the period April 1 through May 31
- September 15 for income received for the period June 1 through August 31
- January 15 of the next year for income received for the period September 1 through December 31
These exact dates can change by a day or two in any given year because taxes become due the next business date when the original dates fall on weekends or holidays. This article includes details on specific business tax due dates for the current tax year.
How Much Must I Pay in Estimated Taxes?
Match your estimated taxes to your income. For example, you can vary the amount of estimated tax you pay for each quarter if you have a seasonal business with more income in one quarter than another. Just remember that you must pay enough tax by each quarterly due date to avoid being charged a penalty. This requirement holds even if you think you might be due a refund at tax time.
To Help You Calculate Estimated Tax Payments
Some resources to help you figure out your estimated tax bill:
- Some tax preparation software programs (the business versions) have an estimated tax calculator.
- How to calculate your estimated tax payments includes several suggestions and resources.
- This article on Estimated Taxes includes a sample estimated tax calculation.
- Some tips for making estimated tax payments.
How Do I Make These Estimated Tax Payments?
Make an estimated payment on your personal tax return using Form 1040-ES.
Make an estimated payment for your corporation using Form 1120-W.
You can pay your estimated taxes in any of the usual ways:
- By check
- Through the Electronic Federal Tax Payment System (EFTPS) (required for corporate estimated taxes)
- By Direct Pay from your bank account, or Credit/Debit card
Don't Just Send a Check to the IRS
If you are paying estimated taxes by check, be sure to include the payment voucher provided by the IRS on Form 1040-ES. There are four vouchers, one for each quarterly payment. The vouchers are numbered and have the dates on them. Use the correct voucher for the correct quarterly payment. Include the words "1040-ES" and your tax ID number on your check.
Which Checking Account to Use for Estimated Tax Payments
What's the best way to make estimated tax payments? Should you use your business account, since the tax is for business income? And what about self-employment taxes?
For estimated taxes, you must pay all personal income tax and the taxes for Social Security, and Medicare, both of which are considered personal taxes. In any case, you can't deduct federal income tax expenses as a business expense.
Penalties for Late Payment or Non-payment of Estimated Taxes
The IRS charges penalties for underpayment and late payment of taxes. These penalties also are charged for estimated tax payments that should have been made.
For More Information on Estimated Taxes
See this IRS article on Estimated Taxes or IRS Publication 505: Withholding and Estimated Tax Payments.
Estimated tax payments can be complicated, and each business situation is different. This article is a general overview and not tax advice. Get help from a tax professional for calculating and paying estimated taxes.