During tax season, too many small business owners get blindsided by unexpectedly large tax bills they thought were paid for. While they do file taxes, much of the problem originates from not knowing about estimated tax and thereby amassing tax debt as a result.
Unlike individual taxpayers who file once a year, the IRS requires small business owners whose income exceeds a certain level to pay estimated taxes every quarter. Moreover, these quarterly taxes differ from annual taxes.
When business owners fail to estimate correctly or miss their quarterly taxes, they can be subject to penalties, which lead to debt. Therefore, the best way to avoid a shockingly high tax bill would be to prepare, organize and plan appropriately.
Estimate your quarterly taxes
There are two main methods of calculating estimated tax:
- Estimate based on last year’s taxes: Small business owners with a relatively regular income can use the previous year’s tax return to estimate how much they should pay in quarterly tax payments.
- Estimate based on what you’ve earned: Small business owners can use current earnings to predict their annual tax bill. They can then estimate how much they will owe each quarter based on their income and deductions thus far.
If business owners make mistakes due to overestimating or underestimating earnings, there are steps they can take to remedy the situation or obtain a refund. Still, estimating quarterly taxes can be complicated, so consulting with a qualified tax professional may be the best course of action.
The IRS typically does not provide notification regarding missed payments until it is too late. To avoid penalties and interest charges, small business owners may consider investing in accounting software or enlisting the help of a tax professional. They should also be aware of their tax responsibilities and deadlines and keep track of any changes to tax laws that may affect their business.