How a Business Pays Income Taxes
Having a business of your own creates new responsibilities for paying income taxes on the profits. Unlike working for someone else as an employee, where the income taxes are supposed to be withheld from your pay, as a business owner you must pay income(and self-employment) taxes a different way.
This is done through paying Estimated Taxes on a periodic basis directly to the appropriate Federal and/or State government. If you fail to make the proper amount of timely estimated taxes, you may be subject to some significant, nondeductible penalties once your total tax liability exceeds certain amounts for the year. Obviously, the government not only wants these taxes from you, it wants them before the appropriate tax year is over. In effect, it wants the use of this money in advance instead of you having it.
The second important reason to make estimated tax payments is to avoid falling behind in your tax obligations. If you wait, then you end up paying the tax bill for the previous year in the current one in which you presumably will have current year tax obligations. This can play havoc with your cash flow, and budget. You end up always "behind the 8 ball" trying to find money to pay for this tax bill.
How And When Estimated Taxes Are Paid
The actual procedure for paying these taxes involves the use of a voucher or coupon to make payments. The payments are either mailed directly to the taxing authority or given to an authorized bank which then forwards the money on your behalf. This depends upon the type of business entity involved.
A taxpayer who is either a Sole proprietor, or a Partner, or a Shareholder of a Subchapter S Corporation must generally pay these estimated income taxes with an Estimated Tax Payment Voucher, Form 1040ES. These vouchers are sent in on a so-called "quarterly" basis although the due dates for federal purposes are not exactly every three months. Rather, they fall on the following dates: April 17; June 15; September 15; and January 15.
This means the business owner is supposed to estimate the taxes that will be owed, then make timely payments on these dates to cover the taxes due. These tax payments are then credited on the proper tax return that will be filed including the business tax liability.
Do you have to estimate and pay 100% of the expected taxes due like this to avoid government penalties? Not necessarily. There are a few exceptions to this penalty. One, as long as you have paid in 90% of the overall tax liability through timely filing of these vouchers, you may be able to avoid these associated penalties for underpayment of estimated taxes.
Two, if you can prove that you paid in an amount exceeding 100% to 105% (depending on your income level) of the previous year's tax obligations on a timely basis, then the estimated tax payments may not have to be as high during the year. Of course, you may be avoiding penalties with these two main exceptions, but you still have to come up with the balance of the tax due when you file!
For a Corporation other than a Subchapter S, these income taxes due should be paid using a different procedure. A coupon called Form 8109 is generally used to make these payments. This coupon is given to an authorized financial institution (most commercial banks qualify) or a Federal Reserve Bank on a periodic basis.
The dates this deposit is due fall on the 15th day of the following months for the year in question: 4th month; 6th month; 9th month; and 12th month. The actual months depend on the tax year the corporation is using for tax filing purposes. Unlike a Sole proprietor who must use a calendar year basis (year ending December 31), regular corporations may select other tax year ending filing dates. However, for a calendar year corporate filer, these dates for the tax year are: April 17; June 15; September 15; and December 15.
Does a corporation also qualify for certain exceptions to making 100% of the estimated taxes due? Yes, there are two main ways to do this. The payments that must be made on a timely basis should be the lessor of either:
1) 97% of the actual tax owed,
or
2) 100% of the tax from the preceding year, if that year was a 12 month tax year and a return filed for that year showed a tax liability.
Conclusion
Paying income and self-employment taxes for a business involves some educated guess work since you are generally paying in advance of the filing of the tax return. It's very difficult for anyone to be 100% accurate in predicting both the income and allowable expenses a business will have for the year--a year in advance.
That's where good recordkeeping comes into play during the year. If you know on a contemporaneous basis your income and expenses, then you can make adjustments during the year if unplanned for changes occur in the business revenues or expenses you had originally projected.
The important thing is to try your best so you don't find out at tax filing time that you owe a relatively large amount of taxes. It's hard enough making a business successful; getting behind in your tax liabilities always makes it even harder.
Reference: Practice Enhancers, Able & Co.
This is done through paying Estimated Taxes on a periodic basis directly to the appropriate Federal and/or State government. If you fail to make the proper amount of timely estimated taxes, you may be subject to some significant, nondeductible penalties once your total tax liability exceeds certain amounts for the year. Obviously, the government not only wants these taxes from you, it wants them before the appropriate tax year is over. In effect, it wants the use of this money in advance instead of you having it.
The second important reason to make estimated tax payments is to avoid falling behind in your tax obligations. If you wait, then you end up paying the tax bill for the previous year in the current one in which you presumably will have current year tax obligations. This can play havoc with your cash flow, and budget. You end up always "behind the 8 ball" trying to find money to pay for this tax bill.
How And When Estimated Taxes Are Paid
The actual procedure for paying these taxes involves the use of a voucher or coupon to make payments. The payments are either mailed directly to the taxing authority or given to an authorized bank which then forwards the money on your behalf. This depends upon the type of business entity involved.
A taxpayer who is either a Sole proprietor, or a Partner, or a Shareholder of a Subchapter S Corporation must generally pay these estimated income taxes with an Estimated Tax Payment Voucher, Form 1040ES. These vouchers are sent in on a so-called "quarterly" basis although the due dates for federal purposes are not exactly every three months. Rather, they fall on the following dates: April 17; June 15; September 15; and January 15.
This means the business owner is supposed to estimate the taxes that will be owed, then make timely payments on these dates to cover the taxes due. These tax payments are then credited on the proper tax return that will be filed including the business tax liability.
Do you have to estimate and pay 100% of the expected taxes due like this to avoid government penalties? Not necessarily. There are a few exceptions to this penalty. One, as long as you have paid in 90% of the overall tax liability through timely filing of these vouchers, you may be able to avoid these associated penalties for underpayment of estimated taxes.
Two, if you can prove that you paid in an amount exceeding 100% to 105% (depending on your income level) of the previous year's tax obligations on a timely basis, then the estimated tax payments may not have to be as high during the year. Of course, you may be avoiding penalties with these two main exceptions, but you still have to come up with the balance of the tax due when you file!
For a Corporation other than a Subchapter S, these income taxes due should be paid using a different procedure. A coupon called Form 8109 is generally used to make these payments. This coupon is given to an authorized financial institution (most commercial banks qualify) or a Federal Reserve Bank on a periodic basis.
The dates this deposit is due fall on the 15th day of the following months for the year in question: 4th month; 6th month; 9th month; and 12th month. The actual months depend on the tax year the corporation is using for tax filing purposes. Unlike a Sole proprietor who must use a calendar year basis (year ending December 31), regular corporations may select other tax year ending filing dates. However, for a calendar year corporate filer, these dates for the tax year are: April 17; June 15; September 15; and December 15.
Does a corporation also qualify for certain exceptions to making 100% of the estimated taxes due? Yes, there are two main ways to do this. The payments that must be made on a timely basis should be the lessor of either:
1) 97% of the actual tax owed,
or
2) 100% of the tax from the preceding year, if that year was a 12 month tax year and a return filed for that year showed a tax liability.
Conclusion
Paying income and self-employment taxes for a business involves some educated guess work since you are generally paying in advance of the filing of the tax return. It's very difficult for anyone to be 100% accurate in predicting both the income and allowable expenses a business will have for the year--a year in advance.
That's where good recordkeeping comes into play during the year. If you know on a contemporaneous basis your income and expenses, then you can make adjustments during the year if unplanned for changes occur in the business revenues or expenses you had originally projected.
The important thing is to try your best so you don't find out at tax filing time that you owe a relatively large amount of taxes. It's hard enough making a business successful; getting behind in your tax liabilities always makes it even harder.
Reference: Practice Enhancers, Able & Co.
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