A business owner is required to pay taxes four time for a year, so it is important to calculate and pay estimated taxes quarterly as a percentage of earnings.
Estimate Quarterly Taxes
If a person work under someone else a portion of the salary is withheld for their paychecks as taxes, but once self-employed, a percentage will have to withheld and sent as taxes to the IRS.
Forwarding payments to the IRS involves filling out a 1040-ES form and mailing a check to the IRS, or pay online through the IRS Payments Gateway. So, estimated payments are to be paid 4 times for a year, namely in April, June, September and January.
Calculating Estimated Quarterly Taxes
The most difficult part of the process is calculating the amount that has to be paid each quarter, as the first thing to take in to consideration is the amount of tax the business will have to pay at the end of the year.
A self-employed individual, or a sole proprietor will have to make an estimated quarterly payment for taxes that are owed for $1000 or more. Likewise a corporation would need to make an estimated quarterly payment for taxes if tax is $500 or more.
So in order to calculate the estimated quarterly payments the following will have to carried out for the year:
- Find out the estimated adjusted gross income
- Taxable Income
- Deductions and Credits
To calculate the above the previous years’ income, deductions and credits can be used for a guide.
The Estimated Tax Worksheet that can be found in the 1040-ES Form will help in the calculations, once the previous year figures are gathered.
The IRS can impose penalties for the following reasons:
- Not paying the due tax on the correct time.
- Not paying enough of the estimated tax or paying too much estimated tax.
To overcome these penalties, the following steps could be followed:
Paying 90% of what is owed this or year or pay 100% (the safe harbor rule) of what was owed last year (which-ever is smaller.).
By following the safe harbor rule, even if the income grew this year, as long as you made payments that would match last years, penalties could be avoided. It should be noted that the additional tax payments will have to be made this year. One note that should be taken into consideration is that if income is more than $150,000, then the requirement is to pay 110% of what was paid last year so that penalties would not be incurred.