Planning for Estimated Tax Payments

Many small business owners know that they will need to pay tax at the end of each year. These taxes include employment taxes as well as federal taxes and state taxes yes the state has an income tax.

However many people don’t realize that the IRS actually requires you to pay your tax in quarterly installments during the current tax year. The bare minimum required amount to pay in quarterly taxes is equal to 90% of your prior year tax liability divided by the four quarters. This is the lowest amount that can be paid on a quarterly basis for a taxpayer to avoid a penalty with the tax return.

There are typically two main reasons it is very important to do tax planning around these quarterly payments at least once during the year.

The first reason is because there was no prior year of activity. If a business was started during the current year, there wouldn’t be any accurate estimate for these quarterly payments based on the prior year. The only way to really know how much you need to pay in tax and what that is going to look like just to do estimated tax payment planning throughout the year and see what your income looks like.

The second reason to do tax planning for estimated taxes is because the current year activity is so vastly different from the prior year. This can go one of two ways: your current year income is significantly higher than last year‘s income or your current year income is significantly lower than last year‘s income. The only way to accurately pay in your estimated tax is to perform analysis and determine what that liability looks like. If your income is essentially higher in the current year than entire year, you will end up under paying each quarter and have a huge tax burden at the end of the year with the tax return. Likewise, if your current year income is significantly less than the prior year income, you will end up over paying your taxes significantly.

The purpose of tax planning for estimated taxes is to make sure that you are paying the estimated income tax liability is equally over the course of the year and for quarterly payments as possible and avoid having any significant over payment or under payment come here at. Ideally with any tax planning, our goal is that when the tax return is filed, it reflects a slight refund.

If you are currently unsure about your estimated tax payments, you don’t have a CPA helping you, and you would like to schedule a tax planning consultation, please feel free to reach me at catherine@cowartroecpa.com or 504-252-0652. I would love to help you out.