Shellie M. Bowman, EA, MSM, CRPC

According to the Internal Revenue Service, taxes must be paid during the year as income is earned or received. To comply, taxes can be paid either through withholding or estimated tax payments. Estimated tax payments may be necessary If the amount of income tax withheld from your salary or taxable retirement income is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards. As a small business owner, it is likely that you will need to make estimated tax payments. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.

If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.

So, the question is, who must make estimated tax payments?

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Who Makes Estimated Tax Payments?

Individuals, sole proprietors, partners, and S corporation shareholders generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.

Corporations generally must make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.

You may have to pay estimated tax for the current year if your tax was more than zero in the prior year. See the worksheet in Form 1040-ES, Estimated Tax for Individuals (PDF), or Form 1120-W, Estimated Tax for Corporations (PDF), for more details on who must pay estimated tax.

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Who Does Not Make Estimated Tax Payments?

By having adequate taxes withheld from your salary and wages, you can avoid paying estimated taxes. To do this, file a new Form W-4 (PDF) with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.

You don’t have to pay estimated tax for the current year if you meet the three following criteria:

  • You had no tax liability for the prior year
  • You were a U.S. citizen or resident for the whole year
  • Your prior tax year covered a 12-month period

You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return. For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.

Source: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes



Bowman Tax & Financial
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