Wednesday, April 23, 2014

Why You Should be Filing Quarterly Taxes / Business Owners

Frank Mullens for MasterCard writes: We as business owners tend to focus our attention on running the day-to-day activities of our businesses. While paying quarterly estimated taxes may seem more of a distraction than a business imperative, nothing could be further from the truth. This becomes quite apparent when you review your tax return. As the amount you owe the government increases, or that small refund is made smaller as a result of underpayment penalties, the importance of making estimated federal income tax payments becomes crystal clear.
 
If you have been in business for several years, you have probably already learned this lesson, perhaps even the hard way. However, if you’ve just begun to chase your entrepreneurial dream, quarterly federal income tax payments are most likely on the bottom of your to-do list, or worse, not even on your radar.

What is Estimated Tax?
Estimated tax is how tax on income not subject to withholding is paid. Estimated tax may be required if withholding is not enough. Withholding is most commonly associated with the taxes deducted from salary and pensions. Common sources of income where estimated taxes may apply include self-employment, interest, dividends, alimony, rents, and gains from the sale of assets, prizes and awards. The Internal Revenue Service’s Publication 505 Tax Withholding and Estimated Tax helps explain how it works.

How Do I Know if I Need to File Quarterly?
Quarterly estimated tax pays income and self-employment tax, as well as other amounts that may be owed. A penalty may apply if too little is withheld or paid as a quarterly estimated tax. A penalty will be charged if quarterly payments are paid late or in an amount less than required even if your return shows a refund.
No quarterly estimated tax payments are due if in the current tax year you met three conditions:
  1. You had no tax liability in the prior year
  2. You were a United States citizen or resident for the entire year
  3. The prior year was a twelve-month year (not a partial year)
Yet, if you are a sole proprietor, partnership, S-corporation shareholder or a self-employed individual owing a tax of more than $1,000, your corporation owes more than $500, or if you had a tax liability last year you may have to make quarterly estimated tax payments.

When Are Payments Due?
Another way to determine when to pay quarterly estimated taxes in order to avoid a penalty is if your withholding and refundable credits are less than the smaller of your expected 2014 tax or your twelve month 2013 tax liability.

For calendar year 2014, taxpayers (adjusted for fiscal year filers) quarterly estimated tax payments must be postmarked by April 15, June 16, September 15, and January 15, 2015. If you file your 2014 tax return by February 2, 2015, paying the balance due with your income tax return, the fourth quarterly estimated tax payment due January 15, 2015 is not required.

The underpayment penalty can be waived if a payment was missed due to a casualty, disaster, or other unusual situation where a penalty would be inequitable or you retired after age 62 or became disabled. Some special rules may apply. Refer to Form 2210 and instructions for Form 2210 for more details.
TIP: Should the government shut down again, don’t gamble on it; make the January 15, 2015 payment.

So How Do I Pay Quarterly Taxes?
The easiest part of paying your quarterly estimated tax is choosing the method in which to pay. Mailing a check or money order with a payment voucher postmarked by the due date is one option, but more and more we are turning to online payments and the government has obliged us. You can go online or use your phone to pay those taxes to the IRS. There are two electronic payment methods to choose from, directly from your bank account or using your credit or debit card. While using a credit/debit card will result in a convenience fee charged by the processor, there are actually some benefits as well. Some benefits include earning points or miles, delaying a cash impact on your business and more. For more information, see Paying the IRS with a Debit or Credit Card for all the details.

Hire an Accountant
If you spend all of your time running the business and taxes are the last thing you have an interest in understanding or time for, hire a trustworthy tax advisor. I recommend asking a friend or trusted colleague for a referral on who they trust with their tax preparation. Tax professionals stay up to date on changes in tax law and requirements and are well worth the monetary investment.

Taxes can be challenging and sometimes downright confusing. The 2013 IRS Tax Code fills an overwhelming 73,000 pages. If you have questions, do a little research. The Internal Revenue Service has online material to help calculate what you owe. When in doubt, consult with a tax professional.

Frank Mullens is the CFO COO at Marketing Innovations International, Inc. where he encourages the persistent evolution of corporate strategy to seize market opportunities and grow profits.  Combining experience as a CPA (inactive), education of an MBA and a variety of accounting and finance roles with a keen understanding of technology, Frank brings a pragmatic view of business to bear on the challenges facing growing businesses.

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