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Do Small Businesses Pay Estimated Tax?

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Last editedOct 20212 min read

One of the biggest parts of running a business, whether big or small, is figuring out the taxes that you should pay on your revenue. Foreseeing your tax payments can help you plan your cash flow and therefore will prevent you from running into problems due to unexpectedly low funds.

Estimated tax is one such regular tax payment to be aware of. This is paid by small business owners, freelancers, independent contractors and also corporations and larger companies, although the way in which this works for each type of entity can differ. Keep reading to find answers to the questions: what is estimated tax and how to make estimated tax payments.

What is estimated tax and who pays it?

Estimated tax is a quarterly payment that is based on income. Everyone who earns income throughout the year must pay taxes on this to the federal government, and therefore this is a pay-as-you-go system. If you are an employee at a company, then you can avoid having to pay this manually by asking your employer to withhold more tax from your earnings. However, if you are a business owner, then you will have to make your own estimated tax payments.

Estimate tax is paid on any income that is not subject to withholding. This refers to the portion of an employee’s wages that do not form part of the paycheck but are instead remitted to tax authorities, therefore reducing the amount of tax that must be paid on income.

Individuals, sole proprietors, partners and S corporations have to make estimated tax payments if they expect to owe tax of over $1000 when the return is filed. On the other hand, corporations must make these payments if they expect to owe over $500 in tax when the return is filed.

So, do small businesses pay estimated tax? Yes, in almost all cases, they do.

What are estimated tax payments?

You might be wondering: what are estimated tax payments? Well, these are regular, quarterly payments that must be made by those earning income in the US.

The quarters correspond to the calendar months, with the first quarter running January 1st – March 31st, the second (which is slightly shorter at 2 months) from April 1st – May 31st, the third from June 1st to August 31st, and the fourth covering the final four months of the year from September 1st to December 31st. Instalment payments are usually due on April 15th, June 15th, September 15th and January 15th for the quarter immediately preceding.

How to make estimated tax payments

It’s important to not only understand what these income taxes are, but also how to make estimated tax payments. There are a number of different ways that you can do this, including sending a Form 1040-ES by mail, using your phone or mobile device with the IRS2Go App, or making an online payment.

If you want to make the process as quick and easy as possible, it’s a good idea to learn how to pay estimated tax online. To do this, you can use the Electronic Federal Tax Payment System (EFTPS). Through this service, you can make all of your federal taxes, arrange installment agreements and even calculate estimated tax payments. The website also keeps a record of your past payments, making it easy to stay on top of your tax.

Estimated tax penalties

As with any tax payment, it’s best to pay off your estimated tax in good time. If you underpay or there are any delays in your payments, then you may face estimated tax penalties. This may occur through the process of withholding or if you made estimated tax payments that were then lower than the actual tax required. If you receive your income in uneven bursts, it’s a good idea to annualize your income and make unequal payments for estimated tax to avoid these penalties.

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