While self-employed business owners normally have to make estimated tax deposits throughout the year, other types of taxpayers do as well. If you receive taxable distributions from an S-Corporation or K-1s showing items of income from a partnership or S-Corporation, you might also have tax depositing requirements. Even if you receive a W-2, you may have to make one if your federal tax withholding is inadequate.
Corporations also have to make estimated tax deposits. However, this article only addresses how to calculate a self-employed person's (filing a Schedule C) estimated tax deposit requirements.
When Are Estimated Tax Deposits Made?
There are four depositing dates during the year. The first is April 15 – a date I usually miss since I’m more concerned with getting my client’s tax return work under control. However, if you had a great first quarter sales at craft shows or selling wholesale, it is important to not let this depositing date go by. April 15 is followed by June 15, September 15 and the last depositing date for the year is the following January 15.
Who Needs to Make an Estimated Tax Deposit?
Anytime your tax liability exceeds $1,000 you should make a tax deposit. Note I stated tax liability and not net income. I tell all my clients their goal is to file a tax return with a tax due or tax refund of $1,000 or less. Wondering where I’m pulling the $1,000 figure from? Well, it’s coming straight from the horse’s mouth – the IRS website.
The $1,000 guideline is oversimplifying it somewhat. You won’t have a penalty for under depositing your tax due if you fall under the safe harbor rules. Here’re the exact safe-harbor rules:
You must make an estimated tax deposit if both of these apply:
- You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and credits, AND
- You expect your withholding and credits to be less than the smaller of 90% of the tax to be shown on your current tax return, OR 100% of the tax shown on last year’s return.
An Example of the Safe-Harbor Estimated Tax Deposit Rules at Work
This is somewhat confusing so let me try to bring it to life with an example. Let’s say your total tax on this year’s 1040 is $5,000. You deposited $2,000 and owe $3,000. Whoops, that’s more than $1,000 and going by the 90% rule, you should have deposited at least $4,500 ($5,000 x 90%). You only deposited $2,000. You’re short deposited under both these criteria. However, suppose your tax on last year’s return was only $1,500. That’s under the $2,000 you deposited, so for this year you’re fine – no penalty.
If all you have is the net income from your craft business, here’s an extremely easy way to come up with a fairly accurate estimated tax-depositing figure. I use it myself for my April 15, June 15 and September 15 estimated tax deposits. For my January 15 estimated tax deposit, I run a set of financial statements to have a more precise figure. By April 15 I like to have at least a pro-forma tax return complete so if I have to extend, I have as accurate a figure as possible for any remaining tax due to send in with the extension form.
Add all your gross income you made during the applicable months. For April 15 estimated tax depositing purposes the months would be January, February March. For June 15, they are April and May. And, September 15’s months are June, July and August.
If you don’t keep formal records, add your business deposits to bank statements and/or deposits into your PayPal account plus any other place you deposit your business gross receipts for those months.
Next, subtract all costs you incurred to earn those gross receipts. This includes your cost of goods sold and all general and administrative expenses like office supplies, automobile expense and professional fees. Your gross receipts less all your expenses equal your net income. This is the amount you use to figure any estimated tax. If you have a net loss, you can stop here. No estimated tax deposit worries for you this time!
- All things being equal, start off with a base line of 30% for your tax due. This percentage includes the 15.3% self-employment tax and assumes you are in the 15% tax bracket. If you know you are in a higher tax bracket, adjust the 30% accordingly.
How to Make an Estimated Tax Deposit
Estimated tax deposits are made on Form 1040-ES. The mailbox rule applies. If the estimated tax deposit is due April 15, as long as the envelope is postmarked April 15, the estimated tax payment is made in a timely fashion.