Why Every Business Owner Should Care About Estimated Tax Payments

by | Jun 15, 2022 | Taxes

Running a service-based business is complicated, and preparing the company’s tax payments is no exception. Business owners are often familiar with estimated tax payments, but may not know their importance or how to prepare them. In this article, we will discuss why every business owner should care about estimated tax payments and some ideas on how to properly calculate them.


What Are Estimated Tax Payments?

Estimated tax payments are quarterly payments made to the IRS. If you believe you will owe at least $1,000 in federal income tax after taking the appropriate deductions and credits, you are required to make estimated tax payments. 

Estimated tax payments are meant to cover FICA (Social Security and Medicare) taxes that W-2 employees automatically have withheld from their paychecks.

Self-employed individuals such as independent contractors, freelancers, and other individuals who do not have withholdings from income received must pay estimated tax payments.

In essence, if you do not have withholdings from payments received for the work you perform, there is a good chance you are required to make estimated tax payments. 

Making estimated tax payments ensures you are paying the correct amount of taxes owed, and is a big reason you should care about making estimated tax payments.


How To Calculate Quarterly Tax Payments

As a service-based business owner, there are a couple of methods you can utilize to calculate the amount of your quarterly estimated tax payments.


Consistent Income Method

The first method is to estimate the amount of taxes you think you will owe for the year, and divide the amount by four. This method is especially useful if income is steady over time. 

For example, suppose your service-based business has generated $50,000 in income for you during each of the past four years. Using a marginal tax rate of 25%, your tax bill will total $12,500. Therefore, you divide $12,500 by four and use this amount as your quarterly tax payment. 


Varying Income Method

The second method is to use the amount already earned during the year to estimate your tax liability. This method is useful if you believe income will vary from quarter to quarter.

For example, suppose during the first quarter your service-based business earned $10,000 in income, but you believe that sales will increase significantly during the rest of the year. In this situation, using the $10,000 figure for all four estimated tax payments may be inadequate. It is better practice to use each quarter’s income figure to make the corresponding quarter’s payment.


How Do I Send In Quarterly Payments?

Many service-based small businesses take advantage of the several tax programs available to process and send their quarterly tax payments. 

IRS form 1040-ES is the form needed to record your income estimate and projected tax bill. If your estimated payments end up being less than or more than the actual amount required, you can submit an additional 1040-ES form to modify next quarter’s tax payment and explain why the modification was needed.

Overpayments are often applied to future quarterly tax payments to offset that tax bill. 


What If I Forget or Choose Not to Pay?

It may be tempting to delay making quarterly estimated tax payments, but possible penalties for failure to pay is another reason why every business owner should care about estimated tax payments. 

The IRS does provide relief from penalties if there is good reason, such as natural disasters or other unusual circumstances.  


When Are Estimated Tax Payments Due?

For 2022, the due dates for estimated tax payments are as follows:

  • April 18, 2022
  • June 15, 2022
  • September 15, 2022
  • January 17, 2023


Tips to Ensure Timely and Accurate Quarterly Tax Payments

Now that we have discussed why your service-based business should care about estimated tax payments, here are some suggestions on how to make the process as stress-free as possible:

  • Keep your books up to date
  • Organize backup documentation such as receipts in easy to locate places
  • Use reminders for the due dates of estimated tax payments. 
  • Consult with a tax professional before sending in your first payments. 


We hope this short article has been useful in explaining why every business owner should care about estimated tax payments. The process of calculating and remitting the required payments becomes easier over time, and keeping records updated and accurate ensures your service based business can avoid possible penalties.


For more information on the services we provide and how our firm can help increase the efficiency and effectiveness of your company, be sure to check out the rest of the North Shore Accounting website!