When you start a new business it can be pretty scary. You have no idea what you’re doing when it comes to setting up your new company and the same is true with paying your taxes. We are going to let you know how to pay your taxes and when you need to pay them, since it’s different than just owing money on April 15th.
How often do I have to pay taxes if I own a business?
Most people think that you owe taxes only once a year, but not if you own a business. If fact, if you owe the IRS more than $1,000, they want you to pay them four times a year, once every quarter. This is true if you’re a big Corporation like Microsoft, or if you are a small sole-proprietorship selling clothing on Ebay.
The IRS expects you to send them money quarterly, but hold on, it is not every 3 months like normal quarters. The IRS has special “government” quarters in which you must make your estimated tax payments. Here is the break down:
| Quarter | Months Covered | Due Date |
|---|---|---|
| Quarter 1 | January, February March | Due April 15th |
| Quarter 2 | April, May | Due June 15th |
| Quarter 3 | June, July, August | Due Sept 15th |
| Quarter 4 | Sept, October, November, December | Due January 15th* |
| Final Payment, if any | Due April 15th |
Why did the IRS make such strange quarters?
You will notice that Quarter 2 has only two months and Quarter 4 has an extra month. Many years ago, Congress was trying to get their budget passed and they were short money. They realized that if they dragged in an extra month of revenue in the 4th quarter, their budget would work. So they added an extra month in Q4, and reduced a month in Q2. This beefed-up the profit & loss for the budget. In other words, they could cook the books to make the numbers look better for their budget. The consequence is we now have a messy quarterly tax payment schedule.
Remember, you have two payments due on April 15th!
That’s right, you owe two tax payments on April 15th when you own a business. Both your 1st quarter payment for the new tax year, and the final payment of the prior year are due on the same day.
What happens if I don’t make my quarterly payments on time?
Estimated Tax Penalties
The IRS loves free money, i.e. penalties! The IRS came up with a special penalty if you don’t make your quarterly payments referred to as the ‘Underpayment Penalty’. The way it works – the IRS expects you to send in 90% of your tax liability during the year. If you don’t make your quarterly payments on time, there is a penalty of 1.74% for underpayment. Let’s say your total tax liability this year is $20,000, if you don’t send in 90% ($18,000) during the year, you will owe the IRS an additional $349 at the end of the year. Keep in mind, if you do make some of your payments, your penalties will be reduced.
What type of business or entity are you?
Depending on the type of entity you have, there are different ways you may have to pay your taxes. Some think that it’s just as easy as mailing a check (like you do when you pay your personal taxes). That is not true. If your business is either a C Corporation or you run a Non-Profit, you must use the dedicated IRS payment system called the Electronic Federal Tax Payment System (EFTPS). If you own any other type of business entity, such as S Corporation, Partnership, LLC, or Sole Proprietorship, you can make your payments by check.
How do I make my tax payments online?
The EFTPS
The IRS created the EFTPS.gov back in 1995, to make payments to them easier. The EFTPS accounts allows you to pay regular or quarterly tax payments at your discretion, by linking a bank account. Once you’ve created an account, they will mail you a four (4) digit PIN. It is very important that you never lose your PIN, since you will need the PIN every time you log onto the EFTPS website. I recommend anyone that owns a business set up an EFTPS account. It allows you to keep track of your IRS payments in one place, you can set up your payments in advance, they don’t charge any fees, and if you don’t like writing checks, it’s a good option.
Do I really want the IRS to have my account number?
Remember, I use to work at the IRS, and the unfortunate truth is that the IRS already has you bank account number. If you’ve ever paid with a check or received a direct deposit refund, you gave it to them. And if they don’t have it, they can acquire it pretty easily. However, if you’re still concerned with them having your account number, I advise people to link it to a bank account with very little to no activity.
How do I pay by check?
If you don’t own a C Corporation, or Non-Profit, you are allowed to pay with check. However, you should make sure to follow the details below so the IRS knows how to process your payment. The information you need to have when you mail a check to the IRS is:
- Make the check is made out to U.S. Treasury (not the IRS)
- Put your SSN in the memo line
- Put the Tax Year on the memo line
- Put the Form # on the memo line
- (optional) include a tax voucher from your CPA for the payment
Example memo line of your check should read: “TY: 2020, Form 1040, SSN: 555-34-1212”
Where do I mail my check?
Depending on what state you live in, you will need to mail your payment to different addresses. Here is a link to the IRS website that lists where to make your payment.
How else can I pay online?
The IRS has also set up an one time payment system called IRS Direct Pay, but just like the EFTPS, you will need to link your bank account.
IRS Direct Pay website: https://www.irs.gov/payments/direct-pay
What if I want to pay with a credit card?
There are various companies and websites online that may let you pay via credit card, however they are not supported by the IRS directly, so the usually charge you back the merchant card processing fee + other fees for using their services. These additional fees are usually 2%-3% of the payment.
We recommend either Check or Direct Pay, so you may save on those additional costs.