Calculate and Pay Estimated Taxes for Your Business
The When, Where, How, and What for Estimated Taxes for Businesses
Many businesses and individuals must make estimated federal income tax payments. Your tax preparer may 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 three-month extension from the IRS on paying and filing federal income tax returns, to July 15, 2020, has passed. Your estimated tax payments for the third and fourth quarters of 2020 are still due on September 15, 2020, and January 15, 2021.
Making Quarterly Estimated Tax Payments
You may need to pay estimated taxes depending on how much you owe and on your business type. Most small business owners don't receive a paycheck, which means income taxes and taxes for Social Security and Medicare aren't withheld from payments. The IRS requires that taxes be paid throughout the year, and estimated taxes are the way to make these payments.
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
If your business is a sole proprietorship or single-member LLC, your business tax is calculated on Schedule C - Profit or Loss for Business, which is included in your personal tax return.
If your business is a partnership, multiple-member LLC, or S corporation, your share of the profits of the business is shown on a Schedule K-1, which is included in your personal tax return.
What's the Rule for Making Estimated Tax Payments?
For all of these business types, you'll need to 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 business, 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?
As you and your tax preparer work on your business tax return, keep the above numbers in mind.
- If you are a sole proprietor, partner, or s corporation shareholder, you can estimate your taxes using the estimated tax worksheet in Publication 505: Withholding and Estimated Tax.
- If you are a corporation, use Form 1120-W to estimate the taxes you owe.
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 income was received:
- For income received for the period January 1 through March 31, the due date is April 15.
- For income received for the period April 1 through May 31, the due date is June 15.
- For income received for the period June 1 through August 31, the due date is September 15.
- For income received for the period September 1 through December 31, the due date is January 15 of the next year.
These dates may change in any one year because taxes aren't due 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, if you have a seasonal business with more income in one quarter than another, you can vary the amount of estimated tax you pay for each quarter. 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 may 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.
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 I use my business account, since the tax is for business income? And what about self-employment taxes?
For estimated taxes, you must pay all personally. Income taxes and taxes for Social Security and Medicare 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.
IRS. "Form 1040-ES Estimated Tax for Individuals." Page 1. Aug. 4, 2020.
IRS. "Estimated Taxes." Accessed Aug. 4, 2020.
IRS. "Form 1040-ES Estimated Tax for Individuals." Page 2. Aug. 4, 2020.
IRS. "Publication 505 Tax Withholding and Estimated Tax." Page 26. Accessed Aug. 4, 2020.
IRS. "Publication 505 Tax Withholding and Estimated Tax." Page 30. Accessed Aug. 4, 2020.