Podcast: Estimated Tax And Penalties

Tax Penalties

Written by Jeff Dvorachek

June 15, 2021

We have talked in the past about cash flow being the number one thing that can bring down a small business. As a business grows, cash flow can be an issue. But as a business grows, so does the potential tax bill at the end of the year. In this Tax Insights Podcast Episode, I want to talk about how businesses pay their taxes and things that might be different here in 2021.

I know we talked about estimated tax payments in the past, but can you give a refresher?

  • As an employee, there are taxes that get taken off your paychecks. But businesses do not have taxes withheld off their income, so they have to calculate it manually.
  • These taxes are then paid in quarterly, generally April, June, September and January each year. Well guess what, the June payment will be due soon.

How are the payments calculated?

  • For most businesses it is calculated based on last year’s income. The IRS calls this safe harbor.
  • Safe harbor says that if a business pays in at least –
    • 90% of your current year tax
    • 100% of PY Tax (110% if AGI over $150k)
  • If you don’t pay in enough, the IRS will charge you an interest penalty.

What happens when a business had low income in 2020 because of the pandemic, but this year their income will be higher?

  • That is a potential problem for this year.
  • If the business 2020 income was low, then the safe harbor estimates are lower.
  • If the business income goes up in 2021, then tax will be owed when the tax return is filed.
  • Now there will not be any penalties, but the additional tax can pose a cash flow problem if the business is not ready.

What should a business do to prepare for this?

  • Company can pay their estimates and also put money aside for the year-end tax bill.
  • Or there is nothing that says that a business can’t pay more than the minimum amount.
  • If business income has doubled, they can certainly pay a larger payment.

If they don’t do either of these, what would happen when they file their return?

  • Normally it is a surprise that businesses may not be ready for.
  • They will owe tax for the current year since they paid estimates based on last year’s lower income.
  • But here is the surprise – they also owe a first quarter estimate for the next year and that estimate is based on the higher 2021 income.
  • Both these payments (current year tax and first quarter estimate) are due at the same time (normally April 15th)

Be sure to talk to a tax professional if you have any questions about estimated taxes and penalties or would like further assistance. 

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Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

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