Making Estimated Tax Payments

Q. I am a 1 person (no employees) sole proprietor.  What would be the best way for me to calculate taxes and make quarterly tax payments (both Fed. and State)?

A. This is one of the most common questions I get from self-employed individuals who are just starting out.  Basically, estimated payments in a self-employed environment is the equivalent to withholding from an employee.  The object is to not pay too much and of course, not pay too little.  Let’s look at a few scenarios to answer your question completely:

1. new business with no history
2. business with history
3. going out of business

You must make estimated payments if you think your tax liability will be more than $1,000 in a calendar year.  The tricky part however is guessing how much income, and therefore tax liability, you will have.  In scenario 3, if your business is losing money and you anticipate having no profit, you may not actually need to make payments.    In scenario 1, if you previously had W-2 wages, you may wish to make payments equivalent to the previous year’s liability.  This number is found on your tax return.  In scenario 2, you need to pay at least 90% of the estimated liability due for the current year, or 100% of the tax liability from the previous year as estimated payments.

There are penalties for underpaying your liability as well.  The best way to get this right is to meet with a CPA or well-qualified tax preparer and go over your estimates for the current year.  CPAs can also help with other parts of your business plan as well to set you up for the best chance of success.

Also keep in mind that the IRS no longer accepts paper coupons for estimated payments.  You need to remit through the Electronic Federal Tax Payment System (EFTPS).

The rules for making estimated payments to your state depends on the state.  Check with the Department of Revenue in your states. Your CPA/tax preparer can help with this as well.

Mandatory Electronic Filing of FTDs—This is a Good Thing

Today’s edition comes from guest blogger, Vickie, Lambert, CPP:

Effective January 1, 2011, the IRS adopted the Financial Management Service (FMS) decision to discontinue the system of processing federal tax deposit coupons. In other words, the IRS is no longer allowing businesses to make employment tax deposits with PAPER coupons. For this move I say to the IRS—BRAVO! I applaud the IRS for moving forward in using 21st century technology.

But not everyone felt this way when the IRS first announced this planned moved. In the guidelines for this new requirement the IRS explained why the decision was made and addressed the various arguments for moving in this direction.

Three main arguments were offered against this new procedure.

1. Placed an undue burden on small businesses. In this day and age most businesses have computers. And since the IRS offers their Electronic Federal Tax Payment System (EFTPS) for free to all businesses this argument really was not well founded. But even if a business does not have an internet accessible computer it does have a phone line. Again since the IRS offers their ACH deposit method which only requires the use of a phone line to schedule a payment through EFTPS this argument fell flat. To take it one step further to ensure access, the IRS increased their support service for this deposit method to 24/7 year-round.
2. Will increase errors in deposits therefore increase the need for the IRS to respond to requests for penalty abatements thus negating any cost savings to the IRS. This argument was not supported by the IRS’s statistics. In fact, their statistics show that businesses that make their FTDs electronically have significantly lower error rates than paper coupon filers.
3. Why not just continue offering the paper coupon option? What is the drawback to having both? The IRS determined that more and more financial institutions are no longer accepting the coupons so continuing their use simply keeps an archaic system going for no purpose. If they were left as an option it would negate the decision to cease processing them even though they are no longer being used.

The one major change to this new regulatory requirement that will put some burden on former paper files for the short term is the change in the definition of legal holidays. Prior to this change a legal holiday included state-wide holidays since local financial institutions would be closed. Now the definition of legal holiday is consistent with all other returns.

So for once I can actually say good job IRS for modifying and upgrading regulations to keep in line with modern technology and for doing away with old and outdated methods.

Vicki M. Lambert, CPP
www.thepayrolladvisor.com

Where Do I Put The Money?

Q. I’m a new employer and have started withholding taxes from my workers checks.  Where do I put the money?

A. Definitely don’t put it under your mattress!  Publication 15 from the IRS is what I like to call the Employer’s Tax Bible. Every employer whether new or seasoned should look through that document each year.  Within its pages, you will see a schedule of how often you must remit the taxes you withhold from employee checks to the IRS.  The section that relates to your question is chapter 11 “Depositing Taxes”.  The frequency depends on the total amount of tax liability you report.  Certain employers can remit their totals with their quarterly 941.  Certain employers must make a deposit monthly.  Still others get semi-weekly treatment.  The largest employers have a next-day obligation for deposits. You can make your deposits using the EFTPS system, or take a paper coupon and check to the bank. If you are using a payroll service, they can likely handle the deposits for you.

All money withheld from employee checks must remain in trust once it comes out.  The employee is relying on you to put their tax payments into an account and pay it for them.  Then, once per year when they file their taxes, those payments will count toward their tax liability.  Many employers recently have been convicted of not paying these taxes and instead running with them or spending them on business or personal expenses.  You don’t what to join that crowd.  Here is a link of some of the cases where employers didn’t pay over the money they withheld.