Estimated Tax for Your Small Business: See If You Have to Pay and How to Calculate It
By Catherine Martin, Lead Tax Research Analyst, The Tax Institute at H&R Block
This blog post was crafted by an expert at H&R Block as part of a series to help your small business with the ins and outs of taxes.
What are quarterly estimated taxes for 2022, and do I have to pay them?
If you run a small business or are self-employed, chances are you’ve heard of the estimated taxes that must be paid quarterly. As you earn income throughout the year, you estimate about how much you owe in taxes. If you earn more, you estimate more, and vice-versa.
Because paycheck withholding doesn’t apply like it would for employees, quarterly payments are how you can pay taxes consistently as you earn.
Who must pay estimated taxes?
Generally, sole proprietors, partners and S corporation shareholders (if you’re wondering which of these applies to your business, check out the Forms of Business Organization section in the KCSourceLink Starting a Business Guide) must pay estimated taxes if they expect to owe tax of $1,000 or more at the time the return is filed. Corporations also generally must make estimated tax payments if they expect to owe tax of $500 or more.
For more information or if you are not sure you need to pay estimated taxes, please complete the worksheet in the Instructions for Form 1040-ES, Estimated Taxes for Individuals.
The exception is that you don’t have to pay estimated tax for 2022 if you were a U.S. citizen or resident for all of 2021 and you had no tax liability for the full 12-month 2021 tax year.
If you receive salaries and wages, you can avoid having to pay estimated tax from your other business by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4, Employee’s Withholding Certificate, with your employer. There is a specific line on Form W-4 for you to enter any additional amount you want your employer to withhold.
If you receive a paycheck, the Tax Withholding Estimator will help you make sure you have the right amount of tax withheld from your paycheck.
How do I calculate my estimated tax?
To figure your estimated tax, you must figure your expected AGI, taxable income, taxes, deductions, and credits for the year. In the Instructions for Form 1040-ES, Estimated Taxes for Individuals, there is a worksheet, the 2022 Estimated Tax Worksheet. You will need this worksheet as well as the Instructions, the 2022 Tax Rate Schedules, which are in the Instructions, and your previous year’s tax return. The previous year’s tax return you will use as a guide to figuring your income, deductions and credits.
Once you match your estimated tax payments to your income and come up with four payments that you will pay throughout the year in each quarter.
If you don’t receive your income evenly throughout the year (for example, your income from a shop you operate is much larger in the summer than it is during the rest of the year), your required estimated tax payment for one or more quarters may be less than the amount figured using the equal installment method.
This annualized income installment method annualizes your tax at the end of each period based on a reasonable estimate of your income, deductions and other items relating to events that occurred from the beginning of the tax year through the end of the period. To see whether you can pay less for any period, complete the 2021 Annualized Estimated Tax Worksheet (Worksheet 2-7), located in IRS Pub. 505, Tax Withholding and Estimated Tax.
When do I pay my estimated tax?
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you don’t pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.
You can choose to pay all the estimated tax by April 18, 2022, or in four installment amounts by the following dates: Payment 1: April 18, 2022, Payment 2: June 15, 2022. Payment 3: Sept. 15, 2022, and the Payment four is owed on Jan. 17, 2023.
How do I pay the estimated tax?
The easiest and fastest way to make the estimated payments is online. The IRS allows several methods of online payment.
Online Account – you can make an online account with the IRS that allows you to see your individual account information that includes any balance, payments, tax records and more. See IRS.gov/account for more information.
IRS Direct Pay – for online transfers directly from your checking or savings account at no cost. See IRS.gov/Payments for more information.
Pay by Card – to pay by a debit or credit card with convenience fee. See IRS.gov/Payments for more information.
Electronic Fund Withdrawal – e-file/e-pay option offered when filing your federal taxes using tax prep software or via a tax professional. See IRS.gov/Payments.
Online Payment Agreement – You can also apply for a monthly installment payment if you aren’t able to make the payments all at once. Once you complete the online process, you’ll receive immediate notice of whether your agreement has been approved. See IRS.gov/Payments for more information.
You can also pay by phone and even pay by cash through retail partners. You can also pay by check or money order through the mail using the Estimated Tax Payment Voucher.
What happens if I don’t pay estimated taxes?
If you didn’t pay enough tax throughout the year, it is more likely than not you will receive a penalty for underpayment of estimated tax. In general, you may owe the penalty for 2021 if the total of your withholding and timely estimated tax payments didn’t equal at least the smaller of:
1. 90% of your 2021 tax, or
2. 100% of your 2020 tax.
Your 2020 tax return must cover a 12-month period. There are special rules for farmers, fishermen, and certain higher income taxpayers.
Getting help with small business taxes
Small businesses can get complicated, especially when it comes to estimated taxes. A small business tax expert can help you make sense of it all.
Block Advisors tax pros specialize in small business taxes and are ready to help you with all your small business tax needs.
More help for your small business
If you’re wondering about other financial resources, workshops and experts you can reach in Kansas City or what other small business help is available to you in the metro, give the KCSourceLink a call at 816-235-6500 or tell us a bit about what you need here. We’ll craft your next steps and connect you with the free and low-cost resources that can move you forward, no matter where you are in your entrepreneurial journey.