Congratulations, you filed your 2016 tax return! Well the fun may not stop there! If you are a small business owner you may need to make Quarterly Estimated Tax Payments. Basically, anyone making money without having taxes withheld can be liable. Put it this way, the government wants taxes paid on your income throughout the year and there can be penalties for not doing so.
How do you determine if you need to pay estimated taxes? The IRS requires estimated payments to be made if both of these situations apply:
- You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits.
- You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your current year’s tax return, or
- 100% of the tax on your prior year’s tax return. (Prior year return must cover all 12 months).
Wasn’t that fun to read? Just pull out those previous tax returns and start writing down the numbers and doing the calculations they mention. If you’re a business owner and your business is not losing money, you’re probably liable for estimated taxes.
Once you determine whether or not you are liable to pay, you need to calculate what you will pay. Grab your previous year tax return and this form to calculate: https://www.irs.gov/pub/irs-pdf/f1040es.pdf
You can always play it safe and pay 100% of prior year’s tax. However, if your AGI is over $150,000 you’ll need to pay 110% to meet that “safe-harbor” amount. If you’re still confused, be sure to enlist the help of your reliable CPA.
Quarterly payments are due, April 18, June 15, September 15, and January 16, 2018. Please note: these are not your typical ‘quarterly filing’ deadlines! You can pay via direct drafts from your bank accounts, credit and debit cards, over the phone and the old fashioned way…put a check in the mail!
Remember, your CPA is your best asset here! If they already do your taxes, have them help you calculate this! They know your situation and can help you to avoid costly underpayments.
Jordan Ilderton, CPA