One of the biggest surprises many business owners have is realizing they owe a large amount of tax on April 15 based on their business income. It is important to note that for Sole Proprietors, Partnerships, LLCs, and S-Corporations, personal taxes can be owed even if no funds are withdrawn from the business.
On the federal level, all business entities (except C-Corporations) are referred to as "pass-through entities." This means the business's net income passes to the owners, who are then responsible for paying taxes on it individually. State-level regulations may differ, but in some states, this revenue is also passed through to the owners.
Federal income tax operates on a "pay as you go" basis, meaning that waiting until April 15 to make tax payments is considered late. Unless you are an S-Corp, there are no tax withholdings made toward your annual tax obligation. In the case of an S-Corp, the amount withheld is based on your salary rather than your business income. It's essential to consider other sources of income, such as a spouse's earnings or investments, as they can contribute to a potentially significant tax liability and penalties come April.
Wondering how to steer clear of penalties and ensure you have the funds for your federal taxes on April 15?
Calculate the minimum you must pay in order to avoid any penalties. Your tax CPA can help you calculate this figure. It is called Safe Harbor.
Calculate what you might really owe.
Estimated tax payments are due April 15, June 15, Sept. 15, and Jan. 15. As your income comes in, we suggest our clients set a certain percentage aside regularly in a separate account to cover these payments.
Estimated payments can be either the Safe Harbor amount or the higher amount calculated in #2 above. If you choose to pay the safe harbor, be sure to have a plan to pay the rest of the amount when the April due date comes along. There is no extension for payments, only for filing.
When you're focused on growing your business, the complexities of facing penalties on top of your regular taxes can be overwhelming. If you find yourself concerned about meeting deadlines and fulfilling requirements, it's wise to seek the guidance of a professional. With their expertise, they can assist you in developing a customized plan that not only saves you valuable time but also helps you optimize your finances. By partnering with a professional, like ourselves, you can navigate the tax landscape with confidence, ensuring both peace of mind and potential cost savings!
