If you own a business, you need to pay estimated taxes, but what are they, when do you pay them, and importantly, how do you estimate them? The tax system in the United States is a “pay as you go” system. This means that when you receive regular W-2 payroll wages, you pay the taxes for the money you are paid in that specific paycheck. When business owners pay themselves outside of W-2 wages, that money is not taxed, because of this, they need to still pay their payroll taxes. This is done through a quarterly tax payment, both to the state and to the IRS. If business owners do pay themselves through W-2 wages, they likely still need to pay estimated taxes. The IRS requires corporations to pay estimates on what they estimate their tax burden to be for the year. How do figure out the estimates for these tax payments? Working with an accountant is an important first step. Your accountant will be able to estimate your taxes for you, so that each quarter you are paying enough to avoid penalties from your state and the IRS. Finally, it’s important to remember that these payments are not “extra payments”. They go toward your eventual tax bill at the end of the year. If your estimates are accurate, your tax payment at the end of the year should be minimal.
Have thoughts or questions relating to estimated tax payments? We’d love to see them in the comments.