Quarterly Estimated Tax Payments
Although April 15 is the deadline for paying taxes on income from the prior year, the IRS does impose a penalty for failing to pay taxes throughout the year. Most taxpayers don’t incur this penalty if they owe less than $1,000 when filing their tax returns.
No penalty is assessed if withholding of income tax from wages equals at least 90 percent of the current year tax liability or 100 percent of the tax shown on the prior year return, whichever is smaller. But individuals with significant income from sources that don’t have withholding are required to pay estimated tax payments.
These payments are submitted four times per year. The payments are usually for equal amounts in order to avoid the penalty. However, a taxpayer with fluctuating income throughout the year may send unequal payments. To avoid the penalty, Form 2210 is filed to report income per quarterly period.
Business owners commonly have questions about quarterly estimated tax payments. This is especially true of new entrepreneurs and those with fluctuating income relative to the prior year. These individuals are common clients of a registered tax agent such as an IRS enrolled agent. Enrolled Agent CPE tackles business owner questions and preparation of Form 2210.
As long as an entrepreneur has income, an estimated tax payment is normally required. There is no exception for new business owners. The ideal system for an entrepreneur is using the known tax from last year to determine the quarterly installments for this year. However, a business with rising income will still owe tax by April 15-even if it’s free of penalty for underpayment of estimated tax.
Conversely, a business with declining income may wish to not pay last year’s amount because a lower tax bill is anticipated this year. In that case, the proprietor should estimate his income for this year, determine the tax, and pay this in four equal payments.
A tax professional, such as an EA can provide the tax calculation. In addition, enrolled agent CPE requirements provide knowledge for monitoring income and refining the tax projection each quarter. If Form 2210 is eventually required, the tax CPE completed by the EA renders competence for this procedure.
Estimated tax payments are also common for individuals with substantial income from rental properties, interest, dividends, or capital gains. In some cases, a taxpayer has a single non-recurring source of income in one quarter that requires calculation of an estimated tax payment. Such cases normally also require completion of Form 2210 to avoid a penalty.
Self-employed individuals owe both federal income tax and self-employment tax with their estimated tax payments. Self-employed proprietors pay the employer plus employee part of Social Security and Medicare taxes as self-employment tax. Therefore, an entrepreneur always owes self-employment tax on his business income. This is true even if he owes no income tax due to having losses from other sources that offset the tax impact of his business income.
As a consequence of EA continuing education requirements, enrolled agents are armed with worksheets and information to provide all necessary assistance with handling quarterly estimated tax payments. EA license professionals alleviate stress about estimated tax payments, help avoid penalties, and provide insight into projected total tax liability payable quarterly and on April 15.