Managing Partner Paul Talbert offers insight on what all you as a business owner and or individual need to know about quarterly estimated taxes…
Q. What are quarterly estimated taxes and why do they exist?
A. The general rule of thumb is, your taxes are to be paid as you go. As a W-2 employee at a company, your employer withholds a portion of every paycheck and allocates this amount to your federal and state tax obligations. When you file your return for the year, it is then determined whether this amount withheld is correct based off of your W-2 earnings and applicable deductions. However, if you are self-employed or have additional income outside of your W-2 wages, this income is also subject to taxes. Similarly, these taxes are typically assessed at the time you file your annual tax return unless you meet the IRS requirements to file estimated tax payments.
Examples of this type of income could be, but are not limited to:
- Interest Income
- Self-employment income from a business
- Dividend Income
- Gains from sales of stock or other assets
- Earnings from a business of which you perform contracted services
So following this rule of thumb, the IRS states, “individuals, including sole proprietors, partners and S corporation shareholders, generally need to make quarterly estimated tax payments if they expect to owe taxes of $1,000 or more when their return is filed. In addition, corporations generally have to make estimated tax payments if they expect to owe taxes of $500 or more when their return is filed.” (IRS.Gov Estimated Taxes)
Q. How do I calculate my estimated tax obligation as an individual or a business and when are quarterly estimated taxes due?
A. As a service we can prepare and file your quarterly estimated taxes, but individuals including sole proprietors, partners, and S corporation shareholders, generally use Form 1040-ES (PDF), to calculate estimated tax on a federal level. If you are a corporation filing estimated taxes, you generally use Form 1120-W (PDF).
In addition to your federal taxes, you must also file estimated payments on a state, local and municipality level. These forms may very well be different and also may vary from state to state. Given the proximity to yearend and recent passing of a new tax bill, it is extremely important that you aim to have your state and local estimated taxes paid before yearend (December 29 is last business day). Beginning in 2018, the State and Local Tax (SALT) deduction will be capped at $10,000. This deduction, which was uncapped in years’ past, came in north of $10,000 for many individuals and businesses. I recommend taking any viable deductions before yearend to maximize this departing benefit.
Here is an article that lists summarizes the changes that come along with the new tax bill: What You Need to Know about the Incoming Tax Law
The estimated tax is determined by calculating your expected gross income, taxable income, taxes, deductions and credits. As these are estimates, if your expected adjusted gross income was either too high or too low in one quarter, you simply adjust your income and taxes to allocate for the estimate in the following quarter. If we determine over the course of the year that you overpaid your estimated taxes, then a refund will be assessed the following quarter.
For estimated tax purposes, the IRS has divided the year into four payment periods and deadlines which can be found here.
Like most IRS payment obligations, an underpayment of taxes and or failure to meet the deadlines will result in a penalty, so I highly recommend consulting with myself to ensure you are fulfilling your obligations and are not subject to these penalties.
Q. I or my business meet the requirements to file estimated tax payments and I would like for Talbert & Talbert to prepare and file this on my behalf. What all do you need from me in order to make this process as smooth as possible?
A. We first need to ensure that your taxes are filed correctly and on time. As a part of this process, we will review your finances to determine whether or not there is an opportunity to reinvest income subject to taxes in a more tax efficient manner. If you’re able to provide us with your gross pay, expenses and credits, along with statements to back up these figures, this will help move the process along.
Ideally, our clients provide us with their updated P&L and balance sheet in addition to the the appropriate backup such as invoices, expense receipts, credit card statements, banking statements, investment account statements, ect.. If you do not have a P&L or financials, we can prepare these for you or your business as an additional service.
If you are still unsure of whether or not you or your business is required to file estimated tax payments, or you want to see if you are able to reduce your tax obligation, please feel free to contact my office at your earliest convenience to setup an appointment ([email protected]).
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