Small-business owners who meet their federal tax obligations by paying estimates every quarter have one more thing to add to their do-lists before 2015: Make sure taxes haven’t been underpaid for the calendar year to avoid penalties when it’s time to file an income tax return.
Ben Micham, CPA and president of Micham and McSwain CPAs in Raleigh, explains who pays quarterly estimates and why it’s important to make sure they fulfill the taxes owed.
Q: Who should have been paying quarterly tax estimates in 2014?
Most small businesses, whether they are sole proprietors or S Corps, are going to have income that doesn’t necessarily have wages against it. Sole proprietors have income that passes through to their personal return. That’s who Micham typically recommends should pay quarterly estimates.
Q: How would owners figure out their tax liability and quarterly estimates if their business has peaks and valleys with earnings?
There are two methods of paying quarterly estimates. Owners can pay 100 percent of the previous year’s liability. For example, if an owner had $10,000 in liability and paid $2,500 each quarter, there won’t be an underpayment of estimated tax penalty.
Those who have increasing income and an uneven income might have to figure out income on an annualized basis. Taxpayers are required to pay in a minimum of 90 percent of the current year’s liability on an annualized basis to avoid the underpayment penalty.
Q: Can owners avoid a penalty by paying what they owe when preparing their federal income tax returns?
Normally, if you owe, you may have a penalty unless you paid more than 100 percent of the previous year’s liability or you paid 90 percent of the current year’s liability. If you haven’t done either, you will have to pay a penalty.
Q: What if you think you haven’t paid enough in estimated taxes but want to catch up before the end of the year to avoid penalties?
You could bump up the year-end payroll by paying yourself a big bonus and withhold the correct amount. The best way to do it is through payroll if you’re an S Corp. Sole proprietors don’t really have that option.
If your liability was $10,000 for 2014 and you made some payments, uneven payments or small payments, they’ll calculate based on how many days you underpaid. Lessen those days by going ahead and paying.
However you do it, if you know you underpaid, the sooner you catch up the better.