What is an Estimated Tax?
Estimated tax refers to the quarterly payment of tax. The tax amount is based on the reported income of the filer. Most small business owners, independent contractors, and freelancers are required to report estimated taxes for the quarter.
In this blog post, you will learn how to estimate tax using the accounting data prepared by outsourced bookkeeping service providers. After reading the blog post, you will know how to calculate estimate tax for your business.
Estimated Tax: An Overview
Estimated tax is calculated for individuals whose taxes are not withheld when they receive salaries. The estimated tax can be on any type of income including dividend income, business income, capital gains, and rental income.
The IRS requires individuals to file quarterly estimated tax payments if the withholding taxes are not deducted at the time of receiving the salary. The estimated tax is deducted every quarter. At the end of the accounting year, the individual can apply for reimbursement or pay the balance.
Important Considerations Regarding Estimated Tax Payment
Taxpayers are required to make payment of estimated tax at the end of each quarter. The due dates for making the estimated tax payments occur on the 15th of Jan., April, June, and Sept.
The tax installment is due every 15th of April, June, and Sept. of the current year and Jan. of the next year.
Remember that taxpayers have to pay a penalty in case the estimated tax equals more than 90 percent of the actual tax liability. Another important thing to remember is that no tax is charged for business partners, shareholders of S Corp, and sole business owners in case the earnings of a business are less than $500. However, individuals who are not residents or citizens of the US don’t have to pay estimated tax on earnings.
For corporations, the minimum threshold for estimated tax payment is $1,000.
To summarize, the following business owners and individuals don’t have to pay estimated tax.
- Business owners, partners, S. Corp owners, and shareholders with income less than $500
- Corporations with an estimated tax payment of less than $1,000
- Individuals were US residents or citizens
Submission of Tax Forms for Estimated Tax
Business owners and individuals must submit Form 1040-ES to pay estimated tax during a fiscal year. Corporations must submit Form 1120-W for submitting estimated tax.
You should also remember that you need to file taxes even when they are not eligible to pay taxes. The penalties may occur if you don’t file tax returns as per the due dates.
Salaried individuals whose withholding taxes are deducted at the time of receiving the salary can inform the employer to deduct more taxes if they think that they owe more tax. They can file Form-W 4 with the employer in which the additional amount is mentioned.
Conclusion
Paying estimated taxes is critical for any business to manage cash flow and avoid penalties. Make sure you contact an experienced outsourcing or QuickBooks bookkeeping service provider for recording financial information as per the generally accepted accounting principles. Depending on whether you use cash or accrual basis of accounting, a qualified accountant can help minimize estimated taxes for the current year. Construction companies benefit from our specialized construction bookkeeping services with job costing support. CPA firms can explore our dedicated bookkeeping outsourcing for accounting firms. Come tax season, our tax preparation services ensure accurate, timely filing. For consistent financial oversight, our monthly bookkeeping services keep everything organized year-round.
Join 1000s of Small Businesses and CPAs who outsourced their Bookkeeping to Maxim Liberty!
Try our award winning services with no risk. We have an unconditional money back guarantee on your 1st payment. Just 5 minutes of your time over the phone, can get you started with the best Bookkeeping service in USA while saving you hundreds of dollars.
Frequently Asked Questions
What is an estimated tax payment?
Estimated tax payments are quarterly tax payments made by individuals and businesses that do not have taxes withheld from their income. Self-employed individuals, freelancers, and businesses with significant non-wage income are required to make these payments to avoid underpayment penalties.
Who needs to make estimated tax payments?
Anyone who expects to owe $1,000 or more in tax after subtracting withholding and credits must make estimated payments. This includes self-employed individuals, freelancers, business owners, investors with significant capital gains, and rental property owners.
When are estimated tax payments due?
Quarterly deadlines are April 15, June 15, September 15, and January 15 of the following year. If a deadline falls on a weekend or holiday, the due date moves to the next business day. Missing deadlines triggers underpayment penalties.
How do I calculate estimated tax payments?
Use Form 1040-ES to estimate your expected income, deductions, and credits for the year. Calculate total expected tax liability and divide by four for equal quarterly payments. Alternatively, pay 100% of the prior year tax liability to avoid penalties.
Can my bookkeeper help with estimated tax calculations?
Yes. Our bookkeepers track your income and expenses quarterly, helping you and your CPA calculate accurate estimated payments. This prevents underpayment penalties and ensures you are not overpaying and tying up cash unnecessarily.