The Importance of Making Estimated Tax Payments
For most business owners, making quarterly estimated tax payments to the IRS is rarely an option; it's a requirement. Here's why you shouldn't ignore this to-do.
For most business owners, making quarterly estimated tax payments to the IRS is rarely an option; it’s a requirement.
Owners of pass-through entities—such as sole proprietorships, partnerships, and S corporations—with an annual tax liability of $1,000 or more must make quarterly estimated tax payments to the IRS. Here’s why you shouldn’t let this to-do escape your list:
Steer clear of troublesome surprises and penalties
If you forget to pay your estimated taxes or ignore the IRS requirement, you could find yourself owing more than you expected on Tax Day. You could also be stuck with penalties, the amounts of which would be based on 90 percent of your total tax for the year or 100 percent of the prior year’s taxes—whichever was less. If your adjusted gross income was greater than $150,000, your penalties would be based on 110 percent of last year’s tax, or 90 percent of current year. Ouch.
Take a minute and mark the following on your calendar:
First Quarter – April 17
Second Quarter – June 15
Third Quarter – September 17
Fourth Quarter – January 15, 2019
Reap cash flow benefits
Writing a check to the IRS is hardly pleasant, but doing so in regular installments versus a lump sum is better for your cash flow. Keep in mind it’s always better to pay something than nothing. Even if you don’t have the money for the full estimate, pay as much as you can, as soon as you can.
Sometimes it makes sense for some seasonal business or those that take out distributions, such as medical practices, to perform quarterly projections to help determine estimate amounts. For example, if your cash flow is typically up in the latter part of the year, it may be advantageous for you to pay a higher estimated tax for the fourth quarter. Your accountant can help you calculate your year-to-date income and projections, so you can make correct—and timely—estimated payments.
Avoid paying more in Medicare and Social Security
Owners of S corporations who take a W2 may not have to pay quarterly estimates—if they pay more in withholdings, that is. But this may require you to increase your W2 income, which could cause you to pay more in Medicare and Social Security on the employer portion.
Set yourself up for success
If you’re just starting out, you may not turn a large profit in your first year. Even if you don’t think you’ll be required to make estimated payments, it’s wise to talk with your CPA right away. You don’t want to risk getting stuck with a large tax bill, and pay-as-you-go is much easier on a new business’s cash flow.
Of course, having a plan for making estimated tax payments is always a smart move, even if your doors have been open for decades. Your accountant can help you make this task a routine—and beneficial—part of managing your business.