One of the greatest organizational and cash-flow obligations for small business owners and self-employed people is to stay up to date with estimated tax payments. If your small business or you as a self-employed individual have fallen behind in estimated tax payments for several months, quarters or even years, you likely need the counsel of an experienced tax law attorney to help you find the way forward. Even if you have a large business and have fallen tens of thousands of dollars behind, do not give in to panic, but rather, work with a professional who can help you find and implement a reasonable solution.
A brief summary of estimated tax payment schedules and percentages
The IRS as well as some states collect quarterly estimated taxes, due April 15th, June 15th, September 15th and January 15th (for the previous year). The first two deadlines in 2020 were postponed without penalties until July 15th, but in normal times, penalties and interest apply when payments are late or underestimated.
Owners of sole proprietorships and partnerships, shareholders in S-corporations, independent contractors, freelancers and landlords are examples of people who live with the challenges of keeping on top of these quarterly tax payments. Estimated tax payments for small businesses range from 13.3 percent to 23.6 percent of profits. Self-employment taxes for individuals at the federal level are generally 12.9 percent with an additional 2.4 percent for Medicare.
Organizational and cash flow challenges for small businesses and the self-employed
In a nutshell, some of the challenges facing those who are on the hook for estimated tax payments include:
Challenge #1: Understanding the estimated tax payment system, organizing and planning for the paperwork and analysis that go into compliance
Challenge #2: Correctly managing a business’s finances to have estimated tax payment funds available when they are needed
Challenge #3: Adjusting estimated tax payments appropriately from one quarter to the next to account for significant changes in anticipated income over the year
Most business owners and self-employed people are well aware of these responsibilities and hire tax accountants to stay on track. However, unexpected market fluctuations, such as when a business experiences a surprise boom while meeting a niche need in the economy after a disaster, can throw a wrench in planning. Staying on top of tax obligations and correcting gaps while meeting other demands of a business is essential.