Estimated tax payments for Business Owners

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elementscpa-estimated-tax-paymentsPart of an optimized tax as an entrepreneur is simplifying your quarterly estimated tax payments. There's usually no getting around sending money to the government every three months, but with the right pieces in place you can make it painless and avoid shortfall surprises at year-end. (Last updated 30 Jun 2021)


The reasons for estimated tax payments

Sending in "estimateds" is really just for one purpose: to avoid an underpayment penalty. Essentially, if you don't send the government enough money during the year and have a balance due on your tax return, they'll calculate interest on the shortfall. Depending on which government agency you owe, that interest usually ranges between 5-to-15%, which can be painful knowing it could have been avoided.

Having said that, there's another good reason to send in estimated tax payments as well: it prevents you from spending the money elsewhere. There's few things worse than letting good profits transform into tax nightmares, simply by failing to earmark Uncle Sam's piece. That's why we recommend setting aside monies from profits as-you-go, avoiding the unnecessary scramble at year-end to make up ground.


How much should you send in estimated taxes?

Estimating your tax can be tricky for entrepreneurs, especially if your business is scaling or has seasonal fluctuations. Depending on your situation, different approaches can take out the guesswork and make it easier:

  • Use last year as a guide – If you're not expecting things to change, last year's tax return can be a pretty accurate calculation of this year's tax. Given that's true, simply take the portion of your total tax that wasn't covered by withholdings from other sources, then divide by four - voíla: your quarterly amount!
  • Applying a rule of thumb to this year's income – If this is your first year or the business is scaling/ fluctuating, applying a blended tax rate to your profits each month will do a better job of getting you close enough. Your particular blended rate will depend on your tax bracket and whether you're paying self-employment or other special taxes (like AMT). 40% for federal and state combined can be a good starting position, or our Tax Design Team can also help determine yours.
  • Run a tax projection – The best way to get a read on your estimated taxes is to do an actual tax projection: prepare a pro-forma tax return and calculate how the different parts interact with each other. We recommend all entrepreneurs have this done at least once a year, and quarterly can be smart if there's large movements or more than one variable in motion.

No matter which method(s) you use, remember that it's an estimate: so be sure to apply a safety buffer for the degree of comfort that works for you.


Sending in the actual estimated tax payment

One of the traps of estimated tax payments is that they're due in three month increments: It's a lot of time going by with tax money dormant in your bank account, which can then give a false sense of thinking you have more than you really do, and therefore spending it before it's needed. We've seen this happen many times, and it's part of why we recommend setting up a separate bank account that you transfer tax money into every month, using the estimate you arrived at above. It seems simple, but it will save you a lot of heartache.

Given that, we also recommend sending estimated taxes online using the government's own website: you get a confirmation, you know it gets applied to the proper tax account, and you don't have to rustle around for checks or stamps, or rush to the post office in time. Here are links to help you out:

  • Federal: A quick, effective method is the IRS DirectPay site, which requires no sign-up. For a more robust scheduling and history tracking features, you can use the EFTPS site, which has a five-day, one-time activation process. And if you're feeling particular "techy", you can make payments from the IRS' own smartphone app: IRS2Go (iOS and Android). (The official federal estimated tax form for individuals is Form 1040ES and for corporations is Form 1120-W.)
  • Maryland: Uses their iFile website for individual estimated tax payments and you can setup an online account same-day. While it gives you the ability to schedule future payments too, be aware that they can't be changed after-the-fact. Also, the site doesn't store your bank information, so you'll need to have your routing/account number ready. (The official Maryland estimated tax form for individuals is Form 502D which is paid via Form PV - unnecessarily confusing, we know.) Businesses can use the bFile BillPay website for business estimated tax payments which works very similarly. (The official Maryland estimated tax form for corporations is Form 500D and the one for pass-through entities electing the new state-level taxation is Form 510D - As of this update, the 510D can only be filed by paper.)
  • DC: Their relatively newer MyTaxDC website has a "Pay by eCheck" option. As you complete the screens be sure to select estimated tax from the options. (The official DC estimated tax form for individuals is Form D-40ES and for S-corps and C-corps is Form D-20ES.)
  • Virginia: Simply visit VATax site, or use the Virginia eForms. Both will let you make payments from your bank account automatically. (The official Virginia estimated tax form for individuals is Form 760ES.)

Lastly, general estimated tax due dates are spaced at weird intervals that aren't exactly quarter ends, or even perfectly three months apart: April 15, June 15, September 15, and January 15. To avoid one of these dates slipping by you, we recommend subscribing to our simple quarterly estimated tax reminder e-mail -- we'll send you a short reminder two weeks before the due date, giving you enough time to take action and avoid stress. Just click this button:

Turning taxes into a "non-event"

Accurately estimating your tax and automating its payment means there's no surprises at tax time. Instead, filing your return at year-end becomes a paper formality and turning your taxes into a non-event becomes a reality. Elements are simple, but powerful.