If you're a business owner who received a penalty for underpaying taxes throughout the year, you might be wondering how to correct this mistake. As a business owner, you're not only responsible for the success and organization of your business but also making sure you pay the IRS correctly. Unlike W-2 employees whose employers handle federal tax withholdings, you are responsible for making estimated quarterly tax payments since you don't have income tax withheld from your earnings. Calculating how much you're responsible for paying can be difficult, so let's talk about three different methods you can use.
Method 1: Pay 90% of the Current Year’s Tax Liability
If you choose this method, assume that your income for the current year will be lower than the previous year.
To accurately calculate this method, consult with a financial advisor or tax professional to estimate your annual income.
Method 2: Pay 100% of Last Year’s Taxes
Under this method, take your previous year's tax liability, for example we will say $40,000, and divide it by 4. You would pay $10,000 every quarter to fulfill your quarterly tax obligation.
Method 3: Pay 110% of Last Year’s Taxes
If your 2023 adjusted gross income exceeds $150,000 (MFJ) or $75,000 (MFS), you must use 110% of the previous year's tax liability. In this scenario, multiply your last year’s tax liability of $40,000 by 110%, resulting in $44,000 or $11,000 every quarter.
While Methods 2 and 3 are best suited if you anticipate your earnings to increase, remember that they represent the minimum you must pay. It's important to know that you might still owe taxes at filing. To prepare for potential tax bills, I recommend setting aside 20-30% of your income.
When to Pay:
Knowing how much you need to pay is one thing; knowing when to pay is equally important. These are the four dates to remember:
Q1: April 15th
Q2: June 15th
Q3: September 15th
Q4: January 15th
The first date is not only the deadline for filing your taxes but also when you must make your first payment of the year.
How to Pay:
To submit your estimated tax payments, visit the IRS website to pay online.
If you want to make sure you’re withholding the correct amount for estimated tax payments, use the link below and I’ll get you the help you need.
Five Pine Wealth Management is an Investment Adviser registered with the Securities & Exchange Commission (SEC), principally located in the state of Idaho. All views, expressions, and opinions included in this communication are subject to change. The information provided should not be relied upon as the sole factor in an investment making decision. Past performance is no guarantee of future results.