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What Are Federal and State Estimated Taxes?

July 2, 2018

What Are Federal and State Estimated Taxes?

If you're a small business owner wondering what federal and state estimated taxes are, this article is for you. It covers what estimated taxes mean, who has to pay them and how.

Keyword(s): P: state estimated taxes ; S: estimated tax payments, federal estimated tax, do i have to pay estimated taxes, how to pay estimated taxes, when to pay estimated taxes

 

Owning a business comes with a lot of responsibility.

According to the U.S. Bureau of Labor Statistics, only 50% of small businesses make it to the five-year mark. And, a quarter of businesses won't survive their first year.

As a small business owner, you're often expected to wear multiple hats. You may have to work extra long hours and make sacrifices at the office, as well as in your personal life.

On top of everything else, you have to worry about keeping the books balanced.

For new business owners, tax time presents a whole new set of confusing issues. It may be the first time you have ever had to think about terms such as "estimated taxes".

Although we may not be able to cut back on long hours at the office, we can help demystify federal and state estimated taxes. Read on to learn what these terms really mean!

Tax Tips for Small Business Owners

If you're a small business owner, you may think that you have bigger things to worry about without factoring in your company taxes. But, you could be wrong.

According to Forbes, mishandling company taxes is one of the top ten legal mistakes small businesses make.

Want to save yourself from looming legal woes? Then you need to understand what tax issues to watch for. Not only will this save you from potentially breaking an important tax law, it could keep your business from being shut down.

Here are some tax tips that'll help your small business stay afloat.

Common Tax Mistakes

It's not unusual for small businesses to have problems when it comes to understanding the ins and outs of company taxes. But, if you aren't careful a small misunderstanding can cost you a lot when it comes to your taxes.

Some of the most common things that can trip up small business owners include:

  • Classification of your small business

  • Not withholding payroll tax

  • Failing to pay federal or state estimated taxes

First, it's crucial that you know the differences in tax classifications and that you classify your small business appropriately. Your business may be considered a sole proprietorship, corporation, partnership, or LLC.

Secondly, if you have at least one employee, you are responsible for withholding payroll taxes. Failing to withhold could equal higher payments in the long run. A professional tax accountant can help you figure out each employee's withholding rate.

Lastly, estimated tax payments is a common area that can trip up small business owners, especially if you are new to owning your own business.

What Are Federal and State Estimated Taxes?

When you own a business, you are typically required to pay estimated taxes. Estimated taxes are the taxes due on your income that isn't subject to withholding which you anticipate owing for the upcoming year.

Federal and state estimated tax payments are usually required by small businesses and other non-withheld sources of income.

According to the IRS, estimated tax payments should be made by anyone who falls under the following qualifications:

  • You expect to owe at least $1000 dollars in tax after entering any withholding amounts and refunds

  • You expect withholding and refund credits to be less than 90% of the tax shown on your current year's return or less than 100% shown on your previous year's tax

If either of the above qualifiers applies to your situation, then you should prepare to pay estimated tax payments.

How to Determine What You Will Pay in Estimated Taxes

Estimated taxes should be paid quarterly. In order to find the amount you are responsible for paying, you should take your quarterly income and multiply it by its applicable tax bracket rate.

If your income for the year is consistent, then you will pay approximately the same amount by each of the four estimated tax payment deadlines. If your income varies by season, then you should make adjustments accordingly.

You can use an IRS form available online to determine the exact amount that your estimated tax payments should be.

Federal estimated taxes refer to your income tax not subject to federal withholding. Similarly, state estimated taxes refer to your taxes on income not subject to state withholding. You will need to find out specific tax rules for the state that you live in before determining how much you should send to the state tax department.

It is not uncommon for state estimated taxes to have a lower threshold than federal tax limits. For example, it may be that if you expect to owe more than $500 dollars in state tax payments, you will have to pay the amount due for state estimated taxes.

How to Pay Estimated Tax Payments

You can pay your federal and state tax payments directly to the IRS by check or money order. Or, you can pay your tax payments easily online. You can even set up authorized payments to be drafted from your business account at the time that the payments are due.

You can visit the IRS website to find out how to pay by check, online, or to set up authorized payments.

Get Professional Tax Help for Your Small Business

If you are just starting out or even if you have owned a small business for a while now, it's highly advisable to consult with a tax professional regarding your finances.

Most of the major mistakes that small businesses make involve how they approach the company's finances. One small mistake in your business finances can cost you.

It's best to hire a professional advisor who is familiar with laws regarding federal and state estimated taxes for small businesses. This is one expense often proves to be well worth it. It could even save your small business from problems that might be potentially fatal.

Need professional tax advice?

We can help.

Contact us today to get the professional tax help that your small business needs to survive!

 

 

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