Most people believe that their income tax payments are due on April 15 or October 15 if they file an extension. This is a common misconception.
The IRS expects income taxes to be paid as you earn or receive income during the year. Tax can be paid in either by withholding the tax from your paychecks or via quarterly estimated tax payments. Typically, the tax withheld from your paycheck will only cover your salary.
If you have other sources of income such as interest, dividends, capital gains from investments, self-employment income, alimony, unemployment income, or rental income, you may have to make estimate tax payments throughout the year.
If you are an owner of an S Corporation, Partnership, or if you are a sole proprietor, you will generally need to make estimated tax payments if you expect to owe tax of $1,000 or more when your tax return is filed. Corporations generally must make payments if they expect to owe tax of $500 or more for the year. If you had no tax liability for the prior tax year, you are not required to pay quarterly estimated payments.
No one likes to owe a big chunk of change at tax time though so planning ahead is still strongly suggested.
If you are on payroll, you can avoid having to pay quarterly estimated tax payments by ensuring that your withholdings cover your entire expected tax liability. Shareholders of an S Corporation or partners in a partnership will need to estimate their taxable income for the year from their business as well as other items of income they receive to determine how much to pay each quarter.
Payments are made to the shareholder’s or owner’s tax return and not the business return because different owners of the same business will have completely different tax liabilities in most cases. If you have a corporation that is not an S Corporation, estimates will need to be paid by the business.
If you do not pay enough tax through withholding and/or estimated payments, you may be charged a penalty on the tax due when you file your tax return. Taxpayers can avoid this penalty if they owe less than $1,000 ($500 for corporations) in tax after subtracting withholdings and credits.
Penalties and interest can also be avoided by paying in the smaller of 90% of the tax due for the current year or 100% of the tax owed on the prior year tax return (110% if adjusted gross income is more than $150,000 for married taxpayers filing jointly). An underpayment penalty can also be charged if your estimated payments are late, even if you are in a refund position.
Quarterly tax payments can be paid with Form 1040-ES by mail, or they can be paid online, by phone, or from your mobile device using the IRS2Go app.
Quarterly Due Dates:
States also have estimated payment requirements with due dates that may or may not match up to the IRS.
Your MOD Ventures tax experts can help to calculate how much tax you should pay in during the year. Reach out to Angela at email@example.com or Breanna at Breanna@modventuresllc.com if you need assistance.