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Date Posted: 6/1/2014

When You Have to Pay Estimated Taxes

By Stefan Schumacher, editor of The Payroll Blog

Estimated taxes are the way taxes are paid on income that is not subject to withholding. This type of income can come from self-employment, interest, dividends, alimony, rent, gains from the sale of assets along with prizes and awards. A person may also need to pay estimated taxes in cases where the amount of income tax being withheld from a salary, pension or other income is not enough. If a person does not pay enough through withholding or estimated tax payments, then a penalty may be incurred. 

As a small business owner, or a bookkeeper or accountant working for a small business, if you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments, assuming you expect to owe tax of $1,000 or more when you file your return. 

If you are filing as a sole proprietor, partner, S corporation shareholder and/or a self-employed individual, you should use Form 1040-ES, Estimated Tax for Individuals, to figure and pay estimated taxes. The Internal Revenue Service’s Publication 505, Tax Withholding and Estimated Tax, provides additional information on filing for a sole proprietor, partners, and/or S corporation shareholder. 

If you are filing as a corporation you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.To file, use Form 1120-W, Estimated Tax for Corporations, to figure the estimated tax and then deposit the payments for remittance. If you had a tax liability for the previous year, you may need to pay estimated taxes for the current year as well. If you have not paid enough by the due date of each payment period, you could still incur a penalty even if you are due a refund at the time you file your tax return.

How do estimated taxes affect payroll?

For employees that receive compensation, it is possible to avoid having to pay estimated tax by requesting that the employer withhold more taxes from earnings when running payroll. This requires the employee to file a new Form W-4 and enter the additional tax amount to withhold. As an employer you are responsible for withholding the amount specified on an employee‘s Form W-4 when running payroll.

Other Resources
Internal Revenue Service


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