Estimated Tax Payments… What are they and why they are needed?

(Please note the below only applies if your business is formed as a S-corporation or LLC)

Every so often our office will ask you to make estimated tax payments to the IRS and possibly to your state taxing authority (i.e. Oregon).  At some point you may have wondered “Why am I being asked to make payments at what seem like odd times”.  To hopefully shed some light on this question, I will try to hit on some key points.shutterstock_118144282

In a nutshell, the IRS has a set of rules that requires most tax payers to pay the tax they are going to owe for a particular year, throughout the course of that year.  They really don’t like, and will penalize you for, paying all the tax you are going to owe when your tax return is filed.  As a business owner you have 2 ways of paying in this tax; via withholding on your payroll (only for S-corps) and with estimated tax payments.  For the most part the IRS doesn’t care how they get their taxes, so long as it is paid to them on time.  So when tax planning we usually try to set up a plan that pays in taxes in a way that maximizes the benefits of your respective entity type and minimizes the potential for interest charges from the IRS.  The IRS has set up due dates for these estimated tax payments on more or less a quarterly basis, which are laid out below.

2015 Estimated Tax Due Dates

4/15/15

6/15/15

9/15/15

1/15/16

What happens if you make a tax payment after one of these due dates?  Don’t fret, as the IRS will not send you to jail or repossess your house.  Any tax payments made after their respective due date could just trigger an interest charge from the IRS that will be paid in when your personal tax return is filed.shutterstock_45913771

Since the IRS wants you to pay the taxes you are going to owe throughout the year, we continually project how much income your practice is going to generate.  This allows us to then adjust the quarterly estimated tax payments to pay in more tax, or less tax, depending on how much income we estimate your practice will produce.  Either way, we are usually trying to ensure you stay as close to “break even” as possible.  This essentially means we want to shoot for you having a small refund or owing a small amount when your personal tax return is filed, which ensures the maximum amount of cash is maintained in your business.

It’s often said there are 2 certainties in life, death and taxes.  If you are formed as an S-corporation or LLC then estimated tax payments will certainly be a permanent part of your life.  So if you ever have questions about the tax payments you are making please don’t hesitate to give us a call.

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