Estimated tax refers to the quarterly payment of taxes for income not subject to automatic withholding. Small business owners, independent contractors, freelancers, and investors are typically required to make these payments throughout the year to stay compliant with the IRS.

In this blog post, you will learn how to estimate your tax liability using the financial data prepared by outsourced bookkeeping service providers. By the end of this guide, you will understand how to calculate and manage estimated taxes for your business to avoid costly IRS penalties.

Estimated Tax: An Overview

The U.S. tax system operates on a “pay-as-you-go” basis. Estimated tax is calculated for individuals and businesses whose taxes are not automatically withheld from a paycheck. This can include business revenue, dividend income, capital gains, and rental income.

The IRS requires taxpayers to file quarterly estimated tax payments to cover their liabilities as they earn income, rather than waiting until the end of the year. If you receive a traditional salary with adequate withholding—an important cost to consider when comparing bookkeeper hourly rates versus an in-house hire—you may not need to pay estimated taxes. At the end of the accounting year, you will calculate your exact liability on your annual return and either receive a refund or pay the remaining balance.

Important Considerations Regarding Estimated Tax Payment

Taxpayers must make estimated tax payments four times a year. The standard due dates for these installments fall on the 15^th of April, June, and September of the current year, and January 15^th of the following year. If a deadline falls on a weekend or holiday, it moves to the next business day.

It is crucial to be accurate. Taxpayers may face an underpayment penalty if their estimated payments fall short. Generally, you can avoid this penalty if your payments equal at least 90 percent of your current year’s tax liability or 100 percent of your previous year’s liability.

The IRS does provide specific safe harbors and thresholds. To summarize, the following business owners and individuals typically don’t have to pay estimated taxes:

• Individuals, sole proprietors, partners, and S Corp shareholders who expect to owe less than $1,000 in taxes after withholding and credits.
• Corporations with an estimated tax liability of less than $500 for the year.
• US residents or citizens who had no tax liability for the preceding 12-month tax year.

Submission of Tax Forms for Estimated Tax

Business owners and individuals must submit Form 1040-ES to calculate and pay their estimated taxes during the fiscal year. Corporations, on the other hand, must use Form 1120-W.

Remember that you still need to file your annual tax returns by the appropriate deadlines, even if you made all your estimated payments correctly. Missing your annual filing deadline will result in separate failure-to-file penalties.

If you are a salaried individual with a side business, you have another option. You can submit a new Form W-4 to your employer and request that they withhold an additional amount from your paycheck to cover the taxes on your extra income, potentially eliminating the need for separate quarterly payments.

Conclusion

Paying estimated taxes accurately is critical for managing your business’s cash flow and avoiding IRS penalties. Make sure you partner with an experienced outsourcing or QuickBooks bookkeeping service provider to ensure your financial records strictly adhere to generally accepted accounting principles. Depending on whether you use a cash or accrual basis of accounting, a qualified professional can keep your ledgers tax-ready for your CPA. Construction companies benefit from our specialized construction bookkeeping services with detailed job costing. CPA firms can leverage our dedicated back-office support to scale their practice. Come tax season, our tax preparation services ensure accurate, timely filing, while our ongoing monthly bookkeeping keeps your finances organized year-round.