A question I often get from clients is, “Do I have to pay estimated taxes?” The answer for most clients who ask this question is, “YES!” Estimated taxes are required for various tax filers, including most small-owned businesses. What are estimated taxes? When are they due? How do I compute estimated taxes owed? What happens if my business fails to pay them by the due date? We will answer these four questions in this blog. 

What Are Estimated Taxes? 
Estimated taxes are just that; they are the business’s best estimate of what Federal and State (if your state collects income taxes) are owned on net income earned for a specified timeframe. If the business incurs a net loss for the time frame, then no taxes are due for that time frame.

 When Are Estimated Taxes Due? 
Typically, taxes are due on the 15th calendar date of April, August, September, and January of the following year. However, the due date could be later depending on what day of the week the 15th falls on. For 2024, estimated taxes are due on:

April 15th, 2024: for earnings between January 1st – March 31st 
June 17th, 2024: for earnings between April 1st – May 31st 
September 16th, 2024: for earnings between June 1st – August 31st 
January 15th, 2025: for earnings between September 1st – December 31st

The January payment can be skipped IF the annual tax return is filed by January 31st and all taxes due are paid.

 How Do I Compute Estimated Taxes?
The computation of estimated taxes is complicated for most people. If you want to compute it independently, you can use Form 1040-ES. However, you will save time and eliminate confusion if you hire a CPA or an Enrolled Agent to compute your taxes. Remember, the number is strictly an estimate. However, to avoid an estimated tax penalty, be conservative and estimate higher rather than lower. This leads to the next question: what happens if you do not file estimated taxes?

What Happens If My Business Fails To Pay Estimated Taxes? 
Unfortunately, many small business owners do not file on time, file a conservatively reasonable amount, or file at all. While the IRS will not send the business a letter during the year when the business (or the owners, for pass-through entities) files the annual tax return, the IRS (and most states’ Department of Revenue will assess a penalty for failure to pay estimated taxes on time or for underpaying taxes. The penalty is computed for each payment period. The penalty is 0.5% of unpaid taxes for each month, up to 25% of the unpaid taxes. Some business owners would rather pay a penalty than pay taxes when they are due. This is not a smart business move. A for-profit business is created to make a profit, so every time funds are ‘given’ to the IRS or any other agency in the form of penalties, it implies less profit for the business.

Every business’s cash projections should include estimated taxes payout for the respective months that payment is due (see above for the dates). Make smart tax business decisions; your business depends on them.

DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting, or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.