As a business owner, you’re responsible for making sure you’re up to date on all your tax obligations – including estimated taxes. What are estimated taxes? Estimated taxes are payments made throughout the year to the IRS for income that is not subject to withholding (think interest, dividends, self-employment income, etc).
If you don’t pay enough in estimated taxes, you may be subject to a penalty. So it’s important to understand how estimated taxes work and make sure you’re paying enough throughout the year. Let’s take a look at what you need to know about estimated taxes.
What Is the Estimated Tax Payment Schedule?
Estimated tax payments are typically made four times per year:
- April 15th (for income earned Jan 1st – March 31st),
- June 15th (for income earned April 1st – May 31st),
- September 15th (for income earned June 1st – August 31st)
- January 15th of the following year (for income earned September 1st – December 31st).
How Much Should I Pay in Estimated Taxes?
This is where things can get a little tricky. The amount you should pay in estimated taxes varies depending on your circumstances. The IRS has a handy calculator on its website that can help you determine how much you should pay. In general, you should pay 90% of your current year’s tax liability or 100% of your prior year’s tax liability. A good rule of thumb is between 25% – 35%.
What If I Don’t Pay Enough in Estimated Taxes?
If you don’t pay enough in estimated taxes, you may be subject to a penalty. The good news is that as long as you owe less than $1,000 in taxes after subtracting withholdings and credits, you will not be penalized.
However, if you owe more than $1,000 in taxes after subtracting withholdings and credits, you will be subject to a penalty equal to the amount of your underpayment multiplied by 0.05. So if you owed $2,000 in taxes but only paid $1,500 in estimated taxes, your penalty would be $50 (($2,000-$1,500)*0.05). Ouch!
The best way to avoid this penalty is to make sure you’re paying enough in estimated taxes throughout the year. Use the IRS calculator mentioned above to help ensure you’re on track!
Estimated taxes can be confusing but they don’t have to be! By understanding how estimated taxes work and using the resources available to help you calculate what you owe, you can avoid penalties and ensure you’re staying on top of your tax obligations. Have questions about your specific situation? Our team of experts at ME Bookkeeping would be happy to help! Schedule a consultation today.
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