Some businesses are required to make quarterly estimated tax payments. For others and individuals, making an estimated tax payment can save you money in the long run! Consulting with a small business accountant can help you make the right choice.
Estimated tax is the method used to pay tax on income that is not subject to withholding. Examples of these are self-employment earnings, interest, dividends, and rental profits. It also includes unemployment compensation, and the taxable portion of social security and retirement distributions, if you choose not to have taxes withheld from that income. The most important reason to make estimated tax payments is to avoid being hit with an underpayment penalty. This can happen if you owe tax on your return.
If you work as an employee and have other sources of income, you can avoid estimated tax payments and underpayment penalties. The best way is by increasing the withholding on your paychecks. The IRS encourages the use of their withholding estimator which can be found on the IRS.gov website. Look under the Individual tab. Using this tool can help avoid an unexpected tax bill and possibly a penalty.
To make a quarterly payment, use the 1040-ES payment voucher and make the payment by check, or use one of the online options including Direct Pay through the IRS website. If you have income from a state other than Florida that has state income tax, you may also be required to make estimated payments there, too. Those due dates may or may not coincide with the federal dates.
There are certain rules that apply when calculating underpayment penalties; for instance, the penalty doesn’t apply if you owe less than $1,000 in tax, or if your 2019 withholding and estimated tax payments meet certain amounts of your 2018 adjusted gross income. The team at Elevate Accounting Solutions can help explain those rules.
We hope that you found these tax tips for small businesses helpful! If you need help with your estimated payment, or performing a withholding checkup, we’ll be happy to assist. Elevate Accounting Solutions are a team of experienced small business accountants in St. Petersburg. Contact us today to schedule your consultation!