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Small business owners and secondary concert entrepreneurs face a major tax deadline.
Files that pay estimated taxes each quarter, including independent contractors and partners in business entities, owe their final payment by 2020 on Jan. 15.
Generally, the remaining deadlines for quarterly taxpayers are April 15, June 15, and September 15.
Last year was extraordinary from a tax planning perspective, as the Treasury Department and the IRS delayed the due dates for first- and second-quarter payments until July 15.
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Employees typically don’t have to worry about quarterly payments. This is because their employers typically withhold their income taxes during the year.
Meanwhile, sole proprietors and other small businesses are responsible for paying their self-employment taxes and income taxes four times a year.
“If you get year-round revenue, the IRS will calculate what tax you owe quarter to quarter,” Dina Pyron, world leader in TaxChat at Ernst & Young, said.
When you do not reach your payments by the deadline, fines for lower payment begin to accrue.
Make accurate payments, avoid fines
Generally, to avoid an underpayment penalty, you must pay at least 90% of the current year’s tax or 100% of the tax on your previous year’s return.
If the adjusted gross income from the previous year’s return exceeded $ 150,000, you will have to pay 110% of the tax liability.
These estimates can be removed with year-end surprises, including commissions and bonuses, that can inflate your income.
Small business owners and many other quarterly taxpayers faced an upward battle in 2020 as they not only faced declining revenues, but were still stuck in these quarterly payments.
Some entrepreneurs had to make difficult decisions until 2020 to achieve this.
“If you have a company drastically affected by Covid-19, and you are a sole proprietor and have to make quarterly estimates, you may have to choose between paying the estimate or keeping the cash in the business,” said Dan Herron, CPA . and director of Elemental Wealth Advisors in San Luis Obispo, California.
“You’re stuck with these quarterly payments, but say your pay is $ 4,000,” he said. “What’s the opportunity cost of $ 4,000. Does that mean you’re staying in business for another month? That’s the decision.”