Calculating Estimated Business Taxes

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There are several small business owners whose monthly income is taxable. However they do not get any salary as they earn their income from the profits they make from their business. They do not have a payroll, thus the question arises that how come tax deductions are levied on income taxes.

What is the process to calculate the estimated taxes?

As per the IRS rule, you need to pay a minimum of 90% of taxes that are levied on income (and self-employment taxes) in a year, so that no penalties or fines are levied on you.

How to calculate the amount that one needs to pay taxes?

Information needed to calculate Business Taxes

In order to compute estimated business taxes using Schedule C, you will first of all have to merge this business income along with the information of income from other sources, deductions, tax withholding, and credits on personal tax return.

Further, the business owners also have to compute self-employment tax (Social Security or Medicare taxes are necessary for business owners) and include this self-employment taxes in order to determine their estimated taxes that they owe.

We have formulated a list of information that we need in order to calculate taxes:

  1. An approximate business income earned during the tax year. This is one of the best ways to compute your income from previous years, or go to the income up to the current date and estimate income for the remaining year.
  2. An estimate of business expenses for the fiscal year, using previous year’s expense as an instruction manual or utilising year-to-date expenses and showing them during the ending of the fiscal year.
  3. The taxes that you estimated are reliant on personal tax situation, therefore one must need to include deductions, personal income, exemptions, credits, and any stop of federal income taxes from the personal income of a business owner. As we have used information about expenses and business income, one can utilise information from previous tax returns as well as year-to-date to depict it at the closing of the year.

Help to Calculate Estimated Taxes: Another way to calculate an estimate of your tax payments is to take help of a  tax preparer to help you prepare an estimate, by utilizing IRS tax calculation worksheet, or another way is to use your previous year's sheet to calculate a rough approximation from the returns prepared using the tax software:

Using the Estimated Tax Calculation Worksheet: One of the best ways to calculate estimated tax is to use the estimated tax calculation worksheet, rendered by the IRS on Form 1040-ES. This document can be downloaded and the details can be filled in the downloaded form of the estimated tax worksheet. Then you need to save this worksheet file on your computer. 

Use Tax Software Packages:

There are several tax software packages that you can use in order to calculate tax for every year so as to get a rough estimate on taxes for the upcoming year. One can also use the returns of the previous year as there are businesses in which itemized deductions do not change every year. You need to just connect to an approximate business income (taxes are withheld for wage income). The tax software computes taxes levied on self-employment. It is not guaranteed that this method will render accurate information, but it offers an approximate value that helps you to plan your taxes.

Calculating Estimated Taxes for Partnerships, LLC's, S-Corporations

When it comes to partnership owners, LLC's, and S corporations are not the employees of the business, but they get paid time to time from the business. These sporadic payments cannot be stopped. Therefore, one needs to pay the estimated taxes. To make an estimation of your tax payments, one can make use of the process which is mentioned above.

Consequently, one can utilise their distributions made in the preceding years in order to calculate an estimated tax value, else one can put forward the current year from the present time.

Don't Forget to Include Self-employment Tax

Business owners are supposed to pay self-employment taxes for instance Medicare and Social Security on business income. Payments for self-employment tax must be inclusive of the personal tax return of a business owner. Further, you need to know that these taxes are not suspended from distributions. Therefore, you need to take account of estimated self-employment taxes while calculating estimated tax payments. One can make use of Schedule SE, or take help from a tax preparer in order to compute estimated self-employment taxes. 

Case Study to compute estimated taxes

We know the fact that business owners are not employees and they also do not have withholding which is taken from you pay as they do not get a paycheck. Moreover,  they also cannot  wait to you lodge your income tax returns in order to pay your income taxes, therefore you need to pay estimated taxes every quarter of the year.  The estimated payments must also include payment for taxes levied on self-employment (Social Security or Medicare). As a business owner, you need to know about some terms such as estimated taxes, amount you need to pay and the penalties incurred in case of non-payment.

Along with this, there are some questions that you might not know that you need to ask. For instance, what checking account must be used need so as to calculate estimated tax payments? If business owner owes more than a specific sum of taxes on your tax return, you need to pay the taxes that are estimated in the following year. Mentioned below is breakage of the minimum sum you need to pay so as to stay clear from the estimated taxes. 

Due Dates for Payment of Estimated Taxes

Estimated tax amount is dependent on the quarterly income, and the date on which the premium is due is 15th of the month that follows to the quarter’s end. If the business owner was unable to pay the due taxes (inclusive of self-employment taxes) last year, and they do not have enough money to withhold and cover up the taxes they haven’t paid, then you might be penalised for not paying enough estimated taxes. This is the reason you need to learn how to calculate the right underpayment amount and penalties that are incurred due to underpayment.  

How to Calculate Estimated Taxes?

One needs to do a rough calculation of the amount they owe in one year. The IRS has a form that can be filled in order to calculate the taxes there are tax software packages, if you do not want to do this then you can go for pen-and-paper calculation. 

Payment Methods for Estimated Taxes

If someone is unable to pay adequate income tax throughout the year, then they need to pay estimated taxes quarterly. As discussed above, we know the fact that most of the business owners are not employees (apart from the corporations), therefore they cannot retain their business income. Thus, many of them need to pay their estimated taxes quarterly. 

Which Checking Account to Use for Estimated Business Taxes

Another quite important question that one needs to figure out is the checking account that needs to be used so as to estimate the business taxes. The answer to this question is certainly quite not easy. The first thing that you need to see is the source of the tax bills before even deciding whether you will pay the taxes from your personal account or business one.

Penalties incurred due to Underpayment

If a business owner does not pay’s adequate estimated taxes, and if their tax bill is quite high then they can be punished for not paying the proper taxes.

Moreover, one can use Form 2210 in order to make sure that they are paying sufficient estimated taxes and can also get to know about the penalty rates.  In this calculation, you might require support from a tax preparer.

Penalties incurred on Late Filing or Late Payment:

  • Unable to file the tax on the due date: If the policyholder is unable to file the tax within the due date then five percent for every month exceeding the due date or part of a month, but it does not exceed 25 percent. If the owner fails to file taxes exceeding 60 days of the due date, then the minimum tax penalty is $135 or 100 percent of the tax.
  • Late payment: 0.5 percent of the taxes that were not paid for each month, or the number of days after the due tax. For those who applied for an automatic extension, no penalties will be charged if the policyholder paid about 90 % of their tax liability on the due date and the remaining amount by the extension date. There are also combined penalties imposed by IRS for filing and paying the taxes late.

Further, there are penalties that are incurred for late filing of your Business Tax returns, penalties related to accuracy, Fraud and Frivolous Return Penalties, Penalty for Bounced Check, and Penalty Relief from   the IRS.

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