Unlike employees, LLC owners usually do not have tax withheld from their pay. The IRS expects tax to be paid as income is earned, which is why quarterly estimated payments exist. Skipping them is one of the most common sources of penalties for new business owners.
Who has to pay
According to the IRS, individuals, including sole proprietors, partners, and S corporation shareholders, generally must pay estimated tax if they expect to owe $1,000 or more when they file. Corporations generally must pay if they expect to owe $500 or more. A single-member LLC or a partnership LLC does not pay estimated tax as an entity in the default case, because the owners pay on their personal returns.
When you can skip them
You generally do not have to pay for the current year if you had no tax liability the prior year, were a U.S. citizen or resident for the whole year, and the prior tax year covered 12 months. You can also avoid estimates by increasing withholding from wages, for example if you or a spouse have a job.
Due dates
There are four payment periods per year, with installments generally due April 15, June 15, September 15, and January 15 of the following year. If a due date falls on a weekend or holiday, the payment is on time if made the next business day. Confirm each year's dates in IRS Publication 505, because the schedule does not follow calendar quarters evenly.
How to calculate a payment
- 1Estimate your net profit for the year from your profit and loss.
- 2Estimate self-employment tax, 15.3% of 92.35% of net earnings. See how much to set aside for business taxes.
- 3Estimate federal income tax after deductions and credits.
- 4Add any state estimated tax.
- 5Divide the total by four, or use the annualized method if income is uneven.
- 6Use Form 1040-ES worksheets or have your accountant prepare vouchers.
Safe harbor methods
- Owe less than $1,000 after withholding and credits.
- Pay at least the smaller of 90% of this year's tax or 100% of last year's tax shown on the return.
- Higher-income taxpayers face a higher prior-year percentage, so check the current rule if your income is high.
- Annualize income using Form 2210 if income is uneven. Corporations use Form 2220.
How to pay
You can mail Form 1040-ES with payment, or pay online, by phone, through the IRS app, or from your IRS online account. Businesses can use a business tax account or Direct Pay, and some payments must go through EFTPS. Pay state estimates through your state's system.
Penalty waivers
The IRS may waive the penalty for a casualty, disaster, or other unusual circumstance, or if you retired after age 62 or became disabled and the underpayment was due to reasonable cause. These are exceptions, not planning tools.
Behind on payments already? See behind on business taxes. Our tax planning service can set up a payment schedule, and you can schedule a business tax planning consultation.
