Does Your Small Business Owe Estimated Tax?
Ro Williams simplifies estimated tax and whether or not your business needs to pay them. Have a question? Ask when you register & we'll try to answer it during the webinar!
Ro is a part of the tax research team at ComplYant. She is an experienced professional in the tax industry and has previously held positions at an International Law firm and Public Accounting firms.
Note: This topic covers U.S. business taxes only.
- 2:20 - What are estimated taxes?
- 3:18 - What are estimated tax payments?
- 5:20 - Who’s responsible for estimated tax payments?
- 5:50 - How often are estimated tax payments made?
- 7:46 - Where to pay estimated tax payments?
- 8:18 - Where to pay estimated tax payments?
- 8:36 - What happens if estimated tax payments are not made?
- 9:38 - Wrap-up
- 10:10 - Q&A
How do the payment amounts get estimated? Is there an IRS calculator or something?
There are a couple of ways to estimate the payment. You can go to the 1040 worksheet, depending on if you're a business owner, if you are an LLC, it depends on what you are. So you can go to the 10 40 ES worksheet. And that worksheet is congruent with worksheets 2-1, or you can go to the 1120 W worksheet. And that also is congruent to 2-1. You use those worksheets together and you come up with the amount, the worksheet walks you through each line item of what you should put and where you should put it.
If you prefer, you can use an estimated tax calculator. And the IRS has one and also Complyant has one. And the estimated tax calculator again is just an estimation, but it's just a quicker way to get to the number of what you owe for those time periods.
What are the different kinds of corporate taxes in the US?
In the US, we have something like a two-tier system, depending on where you live. So if you just have a regular business, just a regular everyday business, then you're gonna pay your federal tax, you're going to pay your state tax. Then you may have to pay your city tax or your county tax. And then you may have to also pay a local tax, which is distributed between the municipals of the city you are in.
Would you recommend a new small business owner pay for an accountant?
Just make sure that what you are doing is accurate. You can buy all the software in the world, but that software doesn't necessarily talk to you about your specific tax needs. I think that's the biggest issue with some people. Another thing about having a company is you try to make the best decision for your company.
It's always good to consult a professional, even if you consult them on a one-time thing, and make sure you have the best software to guide you through that. ComplYant has a calendar to keep track of those dates that you need to make payments. But yes, always consult a professional, especially if it's an area that seems easy, but you don't know the ins and outs of it.
Webinar Transcription: Does Your Small Business Owe Estimated Tax?
Hi everyone. First off, thank you for signing up and joining today's webinar. We're excited to have you with us today. I'm Fran, the Customer Champion here at ComplYant, which is a technology platform that offers business owners and entrepreneurs a simple way to manage tax rules and requirements. If you haven't yet, please check us out at complyant.co, which is COMPLYANT.co. Leading today's webinar, I have the honor of introducing Ms. Ro Williams, who is a part of the tax research team here at ComplYant. Ro is an experienced professional in the tax industry and has previously held positions at an international law firm and public accounting firm. Now, before she gets started, please feel free to text your questions in the chatbox or add a question in the Q and A box, which should be listed at the bottom of your Zoom screen. And I will read them at the end of our talk. Are there any questions before we start? Okay, great. So, let's take it away, Ro.
Thank you, Fran, for that introduction. Hi, and thank you everyone for joining us today for a brief discussion on estimated taxes. Again, my name is Ro and I'm here to guide you through this topic. When we think about business tax, even though we pay different types of taxes throughout the year, we typically think of April 15th, the day your federal taxes are due. But what about estimated taxes? Over the next few minutes, I'll break down estimated taxes in the place where most entrepreneurs run into trouble - estimated tax payments.
Estimated taxes (02:22):
What are estimated taxes? Estimated taxes are a type of tax that individuals and business owners pay on income tax or income that is taxable. Taxable income means the income is subject to withholding. Usually, traditional employees get their income tax taken out of their W-2. However, a business owner or a freelancer does not receive a W-2 so this income is not withheld. For instance, you receive a thousand dollars for one project. Then you are required to pay estimated taxes because that income is taxable. Taxable income means the income is subject to withholding, but because you are a business owner, you do not get these taxes withheld from the income. Overall, estimated taxes, they are pretty simple. It's the estimated tax payments that business owners get tripped up at.
What are estimated tax payments? And again, if you see the letters ETP, that just means estimated tax payments. Estimated tax payments are payments towards your estimated taxes that are made four times a year. Estimated tax payments are there to ease the burden of not having to pay one tax payment per year. So typically, a W-2 employee will pay taxes throughout their paycheck, or they'll pay it one time at the end of the year. So, the estimated tax payments are in place so you don't have to pay that one huge lump sum when you file your taxes. These payments are calculated in a couple of different ways using forms 10 40 ES, worksheet 2-1, or 1120W. The 10 40 ES is the individual worksheet and the 1120W is the business worksheet. These worksheets are not actual tax forms, therefore, you do not need to submit them to the IRS. But the worksheets are in place to tell you an estimation of your tax payment amount. However, throughout the year, the income you estimated may increase or may decrease. So, make sure you're revisiting these worksheets and making adjustments to your estimation whenever you gain additional income or your income decreases. And if you don't want to use the worksheet, you can always go to irs.gov and you can use their free estimated tax income calculator, or ComplYant also has a free estimated tax calculator to help you figure out the approximate amount of what you should be paying. So basically, there are different ways to get to the amount you need to pay. The most important thing is to make sure you are paying your estimated taxes.
Estimated tax responsibility goes to who? (05:19):
Who is responsible for estimated tax payments? You guessed it. You are. The vast majority of small business owners and freelancers have to pay estimated taxes every quarter. If you are an individual, solopreneur, entrepreneur, partner, or shareholder who has made over a thousand dollars in taxable income that has not been withheld, then you are required to pay estimated taxes. How often are estimated tax payments made? I've already touched on this a little bit, but I want to dig a little deeper into when estimated tax payments are due because it can become confusing. Estimated taxes are paid in four payments over a tax year. The payments are due based on income received within certain periods. If you receive income January 1st to March 31st, then your estimated taxes are due April 15th. If you receive income April 1st to May 31st, then your estimated taxes are due June 15th. If you receive income June 1st to August 31st, your estimated taxes are due September 15th. And if you receive income September 1st to December 31st, your estimated taxes are due January 15th of the following year.
However, for 2022, just next year, when you'll pay your estimated taxes for this year, September 1st to December 31st, next year, January 15th is on a Saturday. And if January 15th falls on a Saturday or a Sunday or a holiday, then it goes to the next business day, which is June 18th. And then a couple more things to note. The second payment from April 1st to May 31st covers only two months. While the last payment, September 1st to December 31st, covers four months. These dates look slightly confusing, but these are the official dates located in publication 505 on page 26 just for your reference, if you wanna go and double-check. They are still considered quarterly payments although they fall a little outside the usual quarterly periods.
Where to pay estimated tax payments (07:47):
Where to pay estimated tax payments? There is a multitude of ways to pay estimated tax payments, but I will recommend the easiest ways to pay your estimated tax payments is through the IRS's dedicated website. That's irs.gov/payments or eftps.gov. And if you run a business, you should always have an eftps.gov account because that's where most of your business payments go through. For EFTPS, if you don't already have an account, you should definitely make one before your taxes are due because you have to go through a verification process that may take 7 to 10 business days.
What happens if you don't pay your estimated taxes? (08:39):
What happens if you don't pay your estimated taxes? If an individual or entrepreneur who has made income, but does not have taxes withheld through a W-2, then you are required to pay estimated taxes on any income you have received over the tax year. If you don't pay estimated taxes, then you are subject to tax penalties on the tax you fail to pay plus interest. Millions of business owners receive penalties plus interest for not paying their estimated taxes. If you can't pay all of your estimated taxes, you should still pay as much as you can, which helps lessen the burden of penalties and interests that are applied. And that also shows that you are a good faith taxpayer. However, if you don't pay any at all, you'll pay these taxes that were owed when you file your actual tax return for that year, plus the penalties and interest. So basically, an owner of a company is not taxed the same as an employee of that same company. If you own a company or are a freelancer, then you are required to pay taxes on income that is taxable. If you receive income over a thousand dollars that is subject to taxation and not exempt income, you are required to make estimated tax payments four times a year. So, does anyone have any questions?
Q&A- Getting estimated sales from Shopify (10:18):
And again, please feel free to type in a question on the Q and A box or in the chat. One of the questions that we have is if I use Shopify, I'll just get my estimated sales from there?
So, if you use Shopify and that is your only source of service processing, then yes, you can get your sales from there. So, you can take your gross sales from Shopify, put that number, the gross sales number on your worksheet, or inside the calculator. And that's the number you will use to get the amount that you need to pay for the quarter. Typically, when people use Shopify or Etsy or PayPal, or anything like that, they use the prior year. So, they take the total from the prior year and put that into the calculator so the calculator can split it into four. But if you don't have the total from the prior year, then use the amount from the dates that were broken down in the schedule.
Under/Over paying (11:49):
Great. Another question we have, Ro is how do I know I am not over or underpaying?
Okay, so estimated taxes is an estimation. You don't technically know. The rule of the game is to not pay significantly under so you'll be subject to penalties and interests. If you're paying these estimated taxes throughout the year, then at the end of the year when you're following your taxes, you'll reconcile those payments to your income and your accountant or CPA will adjust the number as fit. But the most important thing is to make the payment, so you'll be showing yourself as a good faith taxpayer and that counts as a lot.
Do you file if you’re shown to not owe taxes? (12:34):
We have another question from Chris. If we're projected not to owe any taxes for the year, do we still have to file quarterly statements indicating that?
Yes. If you are projected to not owe taxes, then technically you still should pay estimated taxes on the income that you already made, but if it falls below the threshold, which I'm assuming you spoke with your accountant or CPA about, then you can file an estimated tax payment as zero because then you're going on record saying you did not owe anything. By not filing what you're saying is that, well, you're not saying much, but what will be interpreted is that either you just didn't acknowledge that you had to pay, or you neglected to pay. So at least file something saying like, “Hey, I don't owe anything for this period.”
Not paying ETP penalty (13:34):
And we have another question that asks what's the penalty for not paying ETP again?
So, the penalty for estimated tax payment is the taxes you failed to pay. So usually, it's up to 25%. So sometimes it'll be up to 25% of a thousand dollars. So, it adjusts based on the amount you should have paid that period and the income you made that period.
How does your business not owe taxes? (14:01):
And we do have two follow-up questions. One is, how does your business not owe taxes?
That's a broad question so I don't know how to answer that. A couple of things, some businesses are in the technology or science sector. And because you're in that sector, you get different tax credits, such as research tax credits, where you are producing these things but they're failing or they're not producing your results. So, you write them off as a research tax credit, but those are specific to a certain industry because there are certain guidelines that you have to meet in order to not pay taxes on that income that was produced off that failure.
Federal application (14:47):
And Chris asks again, is this advice fairly true and consistent across states in addition to federal?
So estimated tax payments that we're adjusting today are specific to federal tax payments. When it comes to state tax payments, usually it is consistent, for instance, the federal tax payment voucher for individuals is 10 40 ES. And Michigan is MI 10 40 ES. It's the same, it's a duplicate of the federal form. We follow the same structures. For your specific state, I don't know which state you're in, I don't know if I know the rules for that state. So, for this specific topic on estimated tax payments, this is triggered towards federal taxes.
Previously owed income tax balance (15:37):
And while we wait to see if there are any other questions, we had a previous question that said, can I take my estimated payment and apply it toward a previously owed income tax balance?
So that's a great question. And no, you cannot. So, for instance, say you're paying your estimated taxes through EFTPS, and you get to select where this tax payment is going. You get to select if it's going to your current taxes, if it's going to your back taxes, if it's going to your withholding taxes, if it's going to your estimated taxes. For estimated taxes, you'll pay for estimated taxes. If you indicate that this money is to my back taxes, then it won't count against your estimated taxes. The thing with that, if eventually, your income adjusts and at the end of the year, your taxes are less than what you suspected while you are paying your estimated taxes, you can request to the IRS for that overage amount to be applied to your previous tax amount.
Why quarterly payments? (16:44):
Great. Another previous question we had was why do we pay them quarterly instead of yearly, like W-2s?
So, the estimated taxes are put in place to ease the burden of a yearly tax payment. Say, for instance, January 1st to March 31st, you made a hundred thousand dollars, but then April 1st to May 31st, you didn't make any money. You still owe that money on that January 1st to March 31st payment. And so, they're kind of put in place to remind you, at the end of the year your income may have adjusted and equalized itself, but you still owe that money for when you made money in this specific time period. And another thing, if you don't pay quarterly payments or period payments, I like to say period, because the quarters are kind of funky. If you don't pay it, then at the end of the year when you file your taxes, you will owe that amount. You'll just owe that amount plus penalties and interest on which you didn't pay.
How do the payments get estimated? (18:03):
Great. How do the payment amounts get estimated? Is there an IRS calculator or something?
Yep. So, there's a couple of ways to estimate the payment. You can go to the 1040 ES worksheet, depending on if you're a business owner, if you are an LLC, it depends on what you are. So, you can go to the 10 40 ES worksheet. And that worksheet is congruent with worksheets 2-1, or you can go to 1120 W worksheet. And that also is congruent to 2-1. You use those worksheets together and you come up with the amount, the worksheet walks you through each line item of what you should put and where you should put it. If you prefer, you can use an estimated tax calculator. And the IRS has one and also ComplYant has one. And the estimated tax calculator again is just an estimation, but it's just a quicker way to get to the number of what you owe for those time periods.
Quarterly tax vs Sales tax (19:09):
Great. So, if there are any other questions, I'm going to ask Ro some questions that were submitted when joining the webinar. But we'd like to wrap up any questions regarding estimated taxes so please submit that in. So, question number one that we received is quarterly tax, sales tax. What, how, and when?
Quarterly tax is a big word. I don't really know what that means, that can be estimated tax payments, or it can be the withholding of your employee's tax payments. So, it really depends on what that is. Sales tax, that's usually owed to the state and so your state should have that information listed on their website. It should be usually around the section with business licenses and things like that. You should be able to find that. All these payments though, the withholding, the sales tax, or your estimated tax payments, they're due four times a year. So that's the most important thing to keep in the back of your mind is that, oh, I have this payment coming up at least four times a year. So, if you only paid it twice a year, you know that you missed some payment somewhere. So, you should go back and check that out. Depending again, on your state, I don't exactly know the dates off-hand because I don't know the state you're in, but just make sure you're paying for payments on sales use, withholding, and estimated tax.
Seller’s Payments (20:53):
Great. Another question we have is, do we worry about the tax less when a customer gives you a seller's permit?
So, a seller's permit is usually when someone is buying wholesale. So, when you buy wholesale, it is different when it comes to sales tax. Depending on the state you're in, those rules adjust to that, but I can speak on Michigan. And in Michigan, when you buy wholesale, then there are two ways you can do it. You can pay the tax upfront, which most people don't do because you don't pay taxes on wholesale items, the end-user pays the tax. But in Michigan, you can pay it upfront, or you can pay it after the product is sold. And if you pay it after the product is sold, then it will start falling into the category of a use tax, which means you still have to pay that tax back. So, there's technically no way of getting around sales tax. The end-user will always have to pay it in some sort or function. The thing with a seller's permit is that it delays the payment.
U.S. Corporate taxes (22:07):
What are the different kinds of corporate taxes in the US?
Different kinds of corporate taxes in the US. Well, in the US, we have something like a two-tier system, sometimes a forest tier system, depending on where you live. So, if you just have a regular business, just a regular everyday business, then you're gonna pay your federal tax, you're going to pay your state tax. Then you may have to pay your city tax or your county tax. And then you may have to also pay a local tax, which is distributed between the municipals of the city you are in.
1st year as an LLC (22:49):
And the last question submitted upon signing up for the webinar is what to expect in your first year in business as an LLC?
So, what to expect overall, generally as a business owner in their first year is a lot of failures, a lot of missed due dates. And that's one reason why ComplYant was built to help first-time business owners and small companies through the process. You have a ton of taxes that you have to keep up with. If it's just you, you don't have to worry about employee withholdings, but if it's not just you, then you start having to worry about employee withholds, unemployment insurance, S U I F I C A, which is the FICA. Depending on if you are selling a product or service, if you're selling your product, then you have to keep up with sales tax, and sales tax they're very hefty. You need to know if you fall into the category of having to pay sales tax in different states. And that's another thing that we can help you with, with the nexus matrix, which is basically the sales tax matrix.
So just make sure you have all your business licenses, make sure that you're filing your annual reports, just because you register a business, doesn't mean that your business is always good. You have to file an annual report every year. And a lot of business owners don't know that if you don't file that annual report every year, then you are subject to falling into non-compliance, which again, you get penalties and fees and no one wants that. What else? Business license, keep your business license up to date. Also, those have to be renewed. And I think that's about it. Business license, annual reports, sales tax, just your everyday tax, your federal and your state tax. Make sure if your city or your county has taxes, keep up with those. And I think that's about it.
Great. And we have one last question and feel free if you did not ask a question in the webinar to email us at firstname.lastname@example.org, which is H E L L O @ C O M P L Y A N T.co. Any questions that you have after the webinar. But Asia asks, would you recommend a new small business owner pay for an accountant, pay our taxes, seems simple enough once you figure out your estimated tax. So, I'm not sure if it's worth the money, but also don't want to make any mistakes.
Yeah, that's the big thing. Just making sure that what you are doing is accurate. So, you can buy all the software in the world, but that software doesn't necessarily talk to you about your specific tax needs. I think that's the biggest issue with some people. Another thing about having a company is you try to make the best decision for your company. So, in my opinion, it's always good to have a second pair of eyes. It's always good to consult a professional, even if you consult them on a one-time thing, like, Hey, can you take this number because, for estimated taxes, you can do that. You can take the number, your gross number from last year, and you can use that to project what you'll owe in estimated taxes this year. So, you can take that number to them or your financials to them. They'll probably want all your financials just to give you an accurate depiction of what you'll owe, and they could produce that. And then you can pay those payments yourself through the tax year because they've already given you that number.
So, my advice is to always consult a professional on your tax needs, make sure you have the best software to guide you through that. ComplYant has a calendar to keep track of those dates that you need to make payments for. But yes, always consult a professional, especially if it's an area where you're like, it seems easy, but I don't know the ins and outs to it.
That's awesome. Thank you, Ro, for hosting today's episode on estimated taxes, and thank you everyone for joining us. For more information, email us again at email@example.com and send us any topic ideas you'd like for us to cover in the upcoming webinars. Thanks, everyone, and have a great day.