Estimated tax payments – tips for managing your small business

Optimizing your estimated tax payments can give your business a competitive edge

Brandon Lafving
by Brandon Lafving, IRS contributor (@TechDragoon)

Michael Dell did not discover electricity, nor the transistor, but he revolutionized PC sales nonetheless. The firm’s main advantage was in keeping a smaller inventory than its competitors, which supported a reduced price scale.

Administrative stuff can seem like fluff, but a basic understanding can help you deliver a lower price tag for your clients/customers with minimum effort. Such was the case with Dell’s success.

READ: Five tax tips for small businesses

Such can be the case with small business taxes.

The volatility of the American economy, combined with wide-scale reform this year makes tax-paying more difficult than it has been historically.

Like all headwinds, these rapid changes are an opportunity for small business owners to differentiate their firms from their competitors by way of successfully navigating the choppy tax waters. Perfection is not required. You just have to be better than the next guy.

Many small businesses are required to submit estimated tax payments on a quarterly basis, but fluctuation in income makes the process difficult to manage.

You might have experienced a bad year last year and thus not been required to make any estimated tax payments. (Anyone who paid taxes on their small business last year can avoid a penalty associated with estimated taxes by paying last year’s tax return amount in quarterly installments.) But the downside of this easy out would come at year’s end – after the bullish economy rewards you with stellar sales and a burdensome tax deficit.

READ: Filing a tax extension for small businesses

Being too generous can lead to penalties on your estimated tax payments, as well, not to mention the missed opportunities to use the funds for business growth.

There are a few ways to help you steer as you go and reduce penalties.

If you are paying your estimated tax payments based on an estimate of your annual income this year, and that income changes drastically in a given quarter, then you might need to amend your estimated tax payments.

Should I amend or annualize my estimated tax payments?
If your income is irregular this year, or if you project to earn the majority of your annual income in a given quarter, then check out IRS Form 2210. The form will guide you through a series of checkpoints for whether an amended or annualized Income Installment Plan would be a better option for you.

READ: Do I have to file a separate tax extension for my business and myself?

Both of these options significantly reduce the penalties you could owe at year’s end.

Businesses that expect more volatility or unpredictability throughout the year will benefit more from filling out the annualized income. The sheet requires more time to fill out than the quick or regular amendment, and it gives you more room to make mistakes. But the upside is reduced penalties and fine-tuned money management.