Let’s start with what we are talking about. Estimated Tax Payments, referred to those in the tax field as ETPs are prepayments to your IRS income tax account. They are required for certain taxpayers by the Internal Revenue Service(IRS) and by many state taxing authorities, including Illinois Department of Revenue (IDOR). The basic rule is that if you earn income and the payor doesn’t withhold taxes, you should be making estimated tax payments. This includes self-employed individuals, small business owners, partners, S-Corp shareholders, and even corporations.
So when are these payments due? For individuals, business owners, partners and shareholders, these are due quarterly on April 15th, June 15th, September 15th and January 15th of each year. Since corporations may operate on either a calendar year or a fiscal year, their estimated tax payments are due on the 15th day of the 4th, 6th, 9th, and 12th month of their tax year.
Corporations must make the payments using the Electronic Federal Tax Payment System (EFTPS). This is an electronic system provided by the IRS and requires registration. Individuals may also register and use this system for their estimated tax payments, but are not required to do so. EFTPS does have the advantage of having a single system where you can check your payment history and make payments as well as schedule payments in advance so that they run automatically. Individuals can also pay online at irs.gov/payments, use the IRS2Go app on a mobile device, or mail payments with IRS form 1040-ES.
How do you know how much to pay? My honest advice here is to have a good accountant who will do this analysis for you on a quarterly basis. However, if you are calculating it yourself, the IRS does provide some worksheets to help you. If you are an sole proprietorship, S-Corp shareholder, or partner, you’ll use IRS form 1040-ES. Corporations can use IRS form 1120-W. Both forms require you to figure information like your expected adjusted gross income for the year. Generally, you can use your prior year’s return as a starting point for things like deductions or credits. Just be sure to make adjustments for changes in your situation or changes in the tax laws.
So what happens if you don’t make estimated tax payments? The short answer is that you may be subject to penalties. Generally, if you owe more than $1,000 at the end of the year and you did not make estimated tax payments, the IRS will assess penalties for failure to pay estimated taxes.