The funny thing about the IRS is that they are more predictable than a small business. So when someone buys a new house and puts their kids in private school based on a great first quarter, and then ends the year with no cash in the business due to a dismal fourth quarter, the IRS still wants their percentage paid in timely throughout the year. For many small business owners this often means making payments for quarterly estimates.
You may not need to make quarterly estimates if you pay in your federal taxes through withholding on wages, pension, social security or other sources of income. If you are required to make quarterly estimates, you may not need to make them for equal amounts during the year if your business income is seasonal or fluctuates significantly. These are things you should discuss with your accountant.
The due dates typically are April 15th, June 15th, September 15th and January 15th. Since June 15th falls on a Saturday, the deadline has been pushed back to June 17th.
Since small business owners often don’t know what their income will be for the year, the IRS has given a couple safe harbor rules to help determine how much tax should be paid during the year. If income is down this year, the safe harbor is 90% of the prior year’s tax. If income is expected to be the same or higher, than the safe harbor is 100% of last year’s tax unless your income is over $150,000. In that case it is 110%.
Last year’s tax is not what you paid on April 15th, but is actually your total tax for the year. This can be found on line 61 on the second page of your 1040.
Other things that could cause you to have to pay quarterly estimates include, but are not limited to significant income increases from sales of stock or property, certain pension or retirement distributions with no taxes withheld, additional side income without taxes withheld, or changes in family size that are not properly accounted for on your W-4. In many cases, these additional taxes can be paid by increasing federal withholding in your paycheck rather than making quarterly estimates.
A final word of caution: even if you owe nothing on April 15th, you may still be hit with underpayment penalties. The IRS wants to receive their money when you earn it. If you pay less taxes in the first three quarters and then make it up later in the year, the IRS can penalize you for the deficiency in those earlier quarters.