Since 2014 is already well underway, I thought a quick primer on quarterly estimated tax payments would be appropriate this month.
Who needs to make quarterly payments?
Theoretically anyone who owes more than $1k in tax at the end of the year should be making quarterly estimates. The idea is that if you owe too much, the IRS says that you should have been paying in your tax quarterly, and therefore they assess a penalty for not doing so.
In general, employees don’t need to make estimates, since their employer withholds taxes from their paychecks throughout the year. Whereas small business owners often do need to make estimates.
When are they due?
They’re due on the 15th of April, June, September, and January.
How much should I pay?
The basic idea is that at the end of each “quarter”, you should project how much tax you’ll end up owing at the end of the year, subtract the estimates you’ve already made, and divide by the number of quarters left.
That said, the underpayment penalty I mentioned above is based on the amount that you underpaid, so you can pay in as little or as much as you want each quarter. However much you pay will get applied to your taxes at the end of the year.
How do I make a payment?
This is the easy part. Just print up the vouchers (Form 1040-ES), cut off the voucher for the appropriate quarter, fill out your info, and mail it with a check. Alternatively you can set up an account on EFTPS.gov, and have the IRS draft it from your bank electronically. The nice thing about doing it this way is that at any time you can log in and see the history of your payments.
For those of you who are monthly clients, we will generally do the calculation for you and send you a voucher with a recommended amount to pay. Whether or not you actually pay it is up to you, but we want you to have the option.
Do I need to pay for the business, or personally?
If you’re a sole proprietor, partner, or S-Corp shareholder, you don’t need to make estimates for the business, just personally. All three of those entity types pass their income through to the individual owners, so the business itself doesn’t pay any tax (there are rare exceptions, but 99% of time this is true).
C-Corporations actually can owe tax, and so if the company is profitable you should consider making estimates on behalf of the corporation as well.