As a business owner, you're responsible for remitting payments to the IRS and state revenue agency on a quarterly basis as applicable. From a high-level, it's a similar concept to any employee who has money taken out of their paycheck; however, business owners must do this via their own with their own calculations or set installment schedule.
As a business owner, you'll want to make sure you have a system down to make sure you're covered with tax payments to the extent you have a tax liability due throughout the year. There are a few viable options to make sure your taxes are taken care of to the level of time involvement you desire.
To be clear, tax payments are NOT required. It is a common misconception that quarterly payments via form 1040-ES are a legal requirement; however there may be interest and penalties if you choose not to make payments.
If you're a business owner who doesn't want to spend time with taxes throughout the year or pay a professional to assist with the process, you can lean on the safe harbor installment method.
The Safe Harbor installment method is the IRS estimate procedure that is designed to avoid interest or penalties. You can exercise a safe harbor payment schedule by paying four equal payments of your prior year tax liability (or 110% of your prior year tax liability if your married filing jointly adjusted gross income was greater than 150,000). This method also works very well if you're income is typically the same each year and earned in generally equal time periods throughout
the year. If your revenue is growing or changes significantly throughout the year, it may not accurately reflect your tax burden at the end of the year. However, rest assured, you will not owe interest or penalty, even if you do owe additional tax, by the time you file your tax return.
For business owners that want to more actively manage their tax payments, you can lean on an annualization method that essentially allows a 'pay as you go' approach. An added benefit of calculating your tax payments on a quarterly method is that it forces you to take a deeper dive into the quarterly finances of your business.
For business owners who are scaling their business or experience cyclical fluctuations in profits throughout the year, the annualization method is recommend as you may pay your taxes due in congruence with how your money is earned.
If you're seeking to avoid interest and penalties, payments are typically due on the 15th of the month of the 4th, 6th, 9th and 1st month of the following year. You may modify the timing of payments to fit your cash flows needs; however, interest and penalties will be assessed to the extent insufficient payments are submitted after these deadlines. As a business owner, you're likely focused on the overall health and wellness of your ventures, and therefore many tax or financial professionals will advise not to get hung up on minimal interest amounts over small timing differences.
For a comprehensive worksheet on figuring your estimated tax using the annualization method, see IRS worksheet 2-7 in Publication 505 from the IRS.
If you're seeking assistance with performing your personal tax estimates, we recommend working with your CPA or qualified financial adviser.
For a complete listing on options to make your federal estimated tax payments, visit https://www.irs.gov/payments.
For options to make your Missouri estimated tax payments, visit https://dor.mo.gov/taxation/individual/pay-online.html.
Please consult your financial advisor, lawyer or accountant for financial, legal, and tax advice specific to your situation. Cedarmill Financial does not provide tax or legal services and any of the content on this website should not be construed as legal or tax advice.
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