Something all businesses have to think about is the reality of quarterly estimated tax payments. In essence, this is the government’s way of trying to get you to pay a part of your taxes quarterly based on figuring out how much you believe you’ll owe by the end of the year in total. The IRS has this thing out there that says they can charge an interest rate of around 3% if you are underpaying your taxes quarterly; it’s “around” because they can change the rate each quarter.
That covers the federal taxes, but what if you’re in a state that has an income tax as well? Although the amount will be much lower that you might be requested to make it seems that each state has different rules on whether they’ll penalize you or not and what the rate will be.
If your business income is pretty similar each year, this becomes a fairly easy calculation. All you really have to do is look at what you make the previous year, how much in taxes you had to pay, divide that by 4 and you know how much you should be paying. Nice, clean and simple.
But life isn’t always like that. Consulting businesses, seasonal businesses, and many other home businesses don’t have that kind of regular money coming in. Some are doing very well while other have periods of struggle, sometimes even lasting the entire year. Even if you happen to be incorporated, the normal rules of engagement might not quite fit what your tax liability might be. After all, there are expenses you get to write off that might impede your own ability to know whether you should even have to pay any quarterly taxes. Your accountant can help you if you have major worries about this.
Here are some tips to help you along, with a caveat that you follow these tips at your own risk because there’s no way we can know everything about your particular situation. It’s a place to get started though, based on research and track records, that might help guide you in some fashion.
First, if you believe your tax liability will be less than $1,000 for the year as an individual or $500 for a corporation, you don’t have to think about quarterly taxes at all. You probably won’t have to deal with any taxes at all, but it depends on your expenses and other things associated with your business.
As a point of clarification, this isn’t saying if you make less than $1,000 or $500. You know the withholding booklet you look at after you’ve calculated your income to see how much tax it says you should have paid for the year? It’s all based off that, and after you’ve estimated your expenses. Thus, if you look at the withholding booklet after you’ve done a calculation and your tax liability is under those numbers, you’re probably good.
You need to remember to look at this as if it’s your yearly income if that’s possible, or else you’ll run into the same problem some people have in not making sure they have enough money taken out for state taxes if they work part time jobs. And you have to also remember to base your calculation off your normal tax filing status; the amount if you’re married will be different than if you’re single.
Second, what if you want a quick down-and-dirty figure to go off? Based off research, there are 4 recommendations:
1. If your gross income is more than $10,000 and your state has income taxes, pay at least half of your state’s rate. Therefore, if your state’s income rate is 4%, pay at least 2%. That’s not much overall so if you want to err on the side of caution go ahead and pay a bit more.
2. If your gross income is between $10,000 and $20,000, pay at least 10% in estimated federal taxes. The withholding book for married would show $446.30 plus 15% of any amount over $6,538, so the figures will be close.
3. For any amount between $20,000 and $40,000, start your thinking from 15% and go up from there. Thus, if you believe your yearly gross will end up being $20,000, think of paying at least $3,000, which quarterly would be $750. For every $5,000 increase add 1-2% to your payment. Now, if you believe your liability will be closer to that $20,000 figure you can probably think of lowering your payment some and still get a refund; if it’s closer to the $40,000 be ready to pay more.
4. If your gross income gets to being at least $57,000 a year, that’s when you have serious thoughts on paying more in estimated taxes. At a minimum your income tax liability will be around $12,500, and you’ll want to continue looking at that 1-2% estimated increase per $5,000.
This is just the down and dirty. There are ways to bring your liabilities down that, if you use a tax professional or accountant, can help to save you money on your taxes. If you’re in a business where you might have to deal with estimated tax payments, obtaining the services of a professional is worth the trouble.
