What are estimated tax payments?
The US tax system operates on a "pay-as-you-go" model. Instead of paying all taxes at the end of the year, businesses and self-employed individuals must estimate their annual tax liability and pay it in installments throughout the year.
These installments are called estimated tax payments, commonly known as quarterly payments because they are typically made four times a year.
Who needs to pay?
This system applies to entities that do not have taxes automatically withheld from their income (unlike regular employees). This includes:
- Corporations: C-Corps & S-Corporation shareholders, paying tax on estimated annual profits or pass-through income;
- Disregarded Entities with ECI (Effectively Connected Income);
- LLC partnership with ECI (Effectively Connected Income) and foreign members.
Generally, a business must make these payments if it expects to owe US$ 500 or more in tax by the end of the year.
How is the amount calculated?
The business or its accountant projects the expected annual profit, applies the corresponding tax rate, and divides the total into four installments. This calculation can be adjusted during the year if actual income changes.
What are the payment deadlines?
Quarterly payments generally follow this schedule:
- 1st quarter: April 15th
- 2nd quarter: June 15th
- 3rd quarter: September 15th
- 4th quarter: December 15th or January 15th of the following year (depending on the taxpayer type)
These IRS deadlines do not exactly match standard calendar quarters.
How do businesses make this payment?
Important: LLC Partnerships must use EFTPS to make their payments. All other entity types can use EFTPS or any of the alternative payment methods listed below:
- EFTPS (Electronic Federal Tax Payment System): A free government system widely used by businesses to schedule federal taxes.
- IRS Direct Pay: Direct payment via the IRS website, available for individuals and small businesses.
- Credit or debit card: Through authorized processors (incurs additional fees).
- Check or money order: Sent by mail with the required form.
If you are a Globalfy Scale client, assistance with calculating and submitting your estimated tax payments is already included in your plan.
What happens if a business doesn't pay correctly?
Underpaying or paying late can result in IRS interest and penalties. To avoid these charges, businesses often work with accountants to ensure precise calculations.
Summary
Quarterly payments are a method to prepay taxes, preventing businesses and self-employed individuals from accumulating large tax debts. They are calculated based on expected profit, paid to the IRS (and sometimes state governments) via electronic systems, cards, or checks, and follow a specific legal schedule.
If you still have any questions or need further assistance with this topic, we are here to help!
✉️ Simply contact us via email at help@globalfy.com or send a WhatsApp message to +1 (866) 428-2030. Our team will be happy to assist you.