With Tax Day right around the corner, people are hustling to make sure they have everything in order when April 15 rolls around. Everyone needs to have all of the necessary paperwork in order to file their income taxes for 2013, but is that all? No, the IRS’s April Fool’s Day prank isn’t two weeks delayed—you actually may owe additional payments on April 15! For business owners, this is the time that estimated tax payments are due for the current year. Not only that, but if you don’t estimate accurately, you’ll owe a penalty if you underpay.
Small Business Owners
If your business is an S corporation, a partnership, an LLC electing partnership taxation, or a sole proprietorship, you can make your estimated tax payments on the same IRS Form 1040-ES that individuals use.
When you use Form 1040-ES to file your estimated taxes, you have to pay in four installments. Your first payment is due April 15, and the next is due on June 15, which sometimes tightens a business owner’s cash flow. The following payments are a bit more spread out, on September 15 and January 15 of the new year, which are often less painful on the wallet.
Businesses that owe $1,000 or more in taxes when they file their return for the year usually have to make their estimated tax payments using Form 1040-ES. If your business shows a loss on your annual tax return, you won’t have to file estimated tax.
While small businesses can make their estimated tax payments similarly to individuals, C corporations abide by slightly different rules. For starters, corporations need to use a different form—IRS Form 1120-W—if they expect they’ll owe $500 or more in taxes for the year. Estimated tax payments are due according to the corporation’s tax year, and payments are due on the 15th day of the company’s 4th, 6th, 9th, and 12th months of the tax year. This means that if a corporation’s tax year ends on June 30, the owner would make tax payments by October 15, December 15, March 15, and June 15. Similarly to how individuals are treated, if the deadline falls on a weekend or legal holiday, the deadline is postponed to the next business day.
Interest and Penalties
Unlike the 10% penalty for withdrawing from your retirement accounts early, penalties for underpayments of estimated tax are not fixed. If you underpay your estimated taxes, the penalty is based on current interest rates.
Stay tuned for our post on how to prevent penalties next week!