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 IRS has announced a three-month extension on paying and filing federal income tax returns, to July 15, 2020. This extension applies to all taxpayers, including businesses, and it also includes an extension on paying estimated taxes. Estimated tax payments for the first and second quarters of 2020, due April 15 and June 15, are now due on July 15.
When Must I Make Estimated Federal Income 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. 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:
For Businesses That Are Not Corporations
So, 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.
For all of these business types, you'll need to look at your net income from all sources, including your business, on your personal tax return. Then look at the tax due. The IRS says you must estimate taxes if:
- You expect to owe at least $1,000 in tax for this calendar year after subtracting your withholding and credits.
- You expect your withholding and credits to be less than the smaller of:
- 90% of the tax to be shown on your tax return
- 100% of the tax shown on last year's income tax return. Your tax return for last year must cover all 12 months.
S corporations (the business, not the owners) must make installment payments of estimated tax if the total of three taxes is $500 or more for the year. The taxes included are tax on built-in gains, excess net passive-income tax, and investment credit recapture tax.
If you are filing a tax return for a corporation, you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file the corporate return.
How Do I Know If I Must Make Estimated Tax Payments?
As you and your tax preparer work on your business tax return, keep the above numbers in mind.
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?
The IRS general rule is that you make estimated payments if both of the following apply:
You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits. AND
You expect your withholding and refundable credit to be less than the smaller of:
- 90% of your total expected tax for this year, or
- 100% of the total tax shown on your last year's return. Your last year tax return must cover all 12 months.
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:
Be sure to include the correct category of payment you are making (Estimated).
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. Be sure to use the correct voucher for the correct quarterly payment. Also be sure to include "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 tax preparation fees for a tax preparer or for business tax software, separate the cost of preparing Schedule C from your personal taxes. Pay the business part with your business tax portion with your business bank account or credit card and the rest with your personal check or credit card.
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.