Federal and State Estimated Tax Payments

August 6, 2020

Overview

Estimated tax payments are a method used to pay tax on income that is not subject to withholding. Normally, a taxpayer collects W-2 wages, such as a salary, where estimated taxes are automatically taken out in the form of withholding. As the taxpayer earns their salary, money is set aside to cover their tax liability. In this situation, no estimated tax payments are required. Most business owners such as Domino’s Franchisees, however, must make estimated tax payments to cover the profit earned by their business. In order to be a Domino’s Franchisee, you must own at least 51% of the entity that holds the Domino’s store. Typically, we recommend a Domino’s Franchisee to set up an S-Corporation. All profit from an S-Corp is reported on the Franchisee’s personal tax return. If a taxpayer does not pay enough tax to cover the Estimated Tax Penalty Safe Harbor (explained below), the underpayment of estimated taxes due may result in an assessed penalty and interest.

Estimated Taxes are Due Quarterly

The four installment payments typically fall on the following due dates:

  1. April 15, current tax year
  2. June 15, current tax year
  3. September 15, current tax year
  4. January 15, year following the current tax year

Estimated Tax Penalty Safe Harbor

An estimated tax penalty will not apply if either of the following amounts are paid through withholding or timely estimated tax payments for the current tax year:

  1. At least 90% of the tax shown on the current year tax return, or
  2. 100% (or 110% if AGI greater than $150,000/$75,000 MFS) of the tax shown on the prior year return.

Waiver of Penalty

The IRS will waive the penalty for underpayment of estimated tax if:

  • In the prior tax year, the taxpayer retired after age 62 or became disabled, and the underpayment was due to a reasonable cause, or
  • The underpayment was due to a casualty, disaster, or other unusual circumstance, and it would be unfair to impose the penalty.

Underpayment Penalty for Fourth Installment

Underpayment penalty for the fourth installment does not apply if the tax return is filed and balance paid in full by January 31.

Extension on Time to Pay

Tax payment alternatives that can extend the time to pay:

  • Request an extension from IRS to pay within 120 days of the return due date,
  • Apply for a 6-month extension due to undue hardship, or
  • File for an installment agreement to make monthly payments.

Summary

Estimated tax payments are a method used to pay tax on income that is not subject to withholding. Most business owners, such as Domino’s Franchisees, must make estimated tax payments to cover the profit earned by their business and avoid underpayment penalties and interest. You have a lot on your peel, let us at D & S Management Services handle calculating your estimated tax payments and all you accounting needs.

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