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Estimated Tax Payments: Are You Paying Enough, or Too Much?

If you operate your business as an LLC, you almost certainly need to make estimated tax payments throughout the year or face penalties and interest charges. Even if you do not have self-employment income from your business, you may still need to make estimated tax payments if you are not having enough tax withheld on your salary or other sources of income, including distributions from your business.

With only two estimated tax payments left for the 2014 tax year, it is time to make sure your payment amounts match up with your projected year-end tax bill.

As a general rule, you determine your coming year’s estimated tax payments when you file your annual income tax return. So, most people determined their 2014 estimated tax payments when they filed their 2013 tax return. This system works well if your 2013 return provided an accurate gauge of your 2014 income. However, business owners—particularly those who are just starting out—often find it difficult to gauge how well the business will do over the next 12 months. And, even long-established businesses can be hit with unexpected events or circumstances. For example, many Midwestern retailers found the “Polar Vortex” put their sales on ice for several months.

For this reason, it makes sense to recalculate your estimated tax liability midway through the year—especially if your income from all taxable sources (business, investments, sale of property, rental payments) increased or decreased significantly. Form 1040-ES, Estimated Tax for Individuals, is the starting point for your recomputation. If you find the amount has changed from your initial estimate, then you will need to use worksheets in Publication 505, Tax Withholding and Estimated Tax, to determine the amount due on the third and fourth installments. (For individuals, the payments are due on September 15, 2014 and January 15, 2015.)

If you operate your business as a regular corporation, you should examine your corporate estimated tax liability, as well as your personal liability. You use Form 1120-W, Estimated Tax for Corporations, to make the calculation. (If you have underpaid, you should make an immediate catch-up payment to reduce your exposure to penalties.) Calendar-year corporations must pay the third installment on September 15, 2014 and the fourth installment on December 15, 2014.

And, while you are trudging through IRS forms and schedules, investigate whether paying estimated taxes using an annualized method makes sense for your business. Annualized payment methods help businesses that have significant fluctuations in income by lowering payments during slow times. For example, a roofing business in the Midwest is likely to receive most of its income in May through September. Such a business might benefit from the annualized income payment method. Individuals can use worksheets in Publication 505 to determine if this is the right method for their businesses. Corporations will find the necessary computations on Form 1120-W.

Even if you find you are on track with your estimated tax payments, taking time to examine how your business is doing midway through the year can provide renewed enthusiasm going into the final months of 2014.

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