Demystifying Estimated Taxes

By: Business Advisor Peter Harriman

taxes generic image

One of the hardest and least understood topics I find small businesses face, especially new start-up businesses, is the issue of Estimated Taxes. Part of the problem is that a taxpayer needs to understand their adjusted gross income for the year, in addition to deductions and credits, in order to properly plan the four quarterly payments throughout the year. With a business in its first or second year, this can be problematic to say the least. Paying late or paying too little will incur penalties with the IRS.

In a recent report done by the IRS, the number of people subject to Estimated Tax penalties has jumped from 7.2 million in 2010 to 10 million in 2015, an increase of nearly 40 percent. The penalty amount varies by circumstance, but the IRS states it can be several hundred dollars.

In general, the IRS says that taxpayers don’t have to pay a penalty if they meet any of these conditions:

  • You expect to owe less than $1,000 in TAX on your tax return
  • Throughout the year, you paid the smaller of these two amounts:
    • 90% of the tax to be shown on your current tax return, or
    • 100% of the tax shown on last year’s income tax return if last year’s AGI was under $150,000 filing married or $75,000 if filing married filing separate. If you are above this high-income thresholds, then it jumps to 110%. Your tax return for last year must cover all 12 months.
    • Source: https://www.irs.gov/pub/irs-pdf/f1040es.pdf

While the IRS has great literature on this subject, the actual calculations are going to come down to the business owner. A great site that I found to help with these calculations can be accessed here.

Or if you like the old school calculations by hand, the IRS has created a worksheet form to try to help; Form 1040-ES. There are also many different ways to make a payment now.

Remember, there is also Maine Estimated Taxes to think about! For more information for the Maine Taxes, go here. And to make payments for the Maine Taxes, here:

In general, the 2018 dates that payments will be due are:

1st Payment  –   Tuesday, April 17, 2018

2nd Payment –   Friday, June 15, 2018

3rd Payment  –  Monday, September 17, 2018

4th Payment  –   Monday, December 17, 2018

To help with this, I have created an excel spreadsheet that summarizes this information and figures out the days until the payments are due! If interested, just let me know and we can talk! My contact info is here.

With proper planning, Estimated Tax Penalties should not be an expense you need to estimate into your budget! First payment is due April 17th!