How Do I Calculate Estimated Taxes for My Business?

Calculate Estimated Taxes for Business
Calculate Estimated Taxes for Business. Thomas Fricke/Getty Images

Calculating Estimated Business Taxes

Many small business owners must pay estimated taxes on the profit from their business because they are not employees and they don't have payroll tax deductions for income taxes and for Social Security/Medicare. So, how do you know how much to pay in estimated taxes?

The first thing to remember is that, if you are paying your business taxes based on your income from a Schedule C, you must consider all of your business and personal income in the calculation.

 

The IRS rule is that you must pay at least 90% of income taxes (and self-employment taxes) during the year, to avoid fines and penalties. But how do you know how much to pay in estimated taxes?

Information Needed to Calculate Estimated Business Taxes

To calculate estimated business taxes from Schedule C, you will need to combine this business income with information on other income, tax withholding, deductions, and credits on your personal tax return. You will also need to calculate self-employment tax (Social Security/Medicare taxes for business owners) and include self-employment taxes in determining estimated taxes due.

Here is a list of the information you will need:

1. An estimate of business income for the tax year. You can use your income from previous years, or take your income up to the current date and estimate income for the rest of the year.

2. An estimate of business expenses for the year, using previous years as a guideline or using year-to-date expenses and projecting them through the end of the year.

3. Because your estimated taxes depend on your personal tax situation, you will need to include personal income, deductions, credits, exemptions, and any withholding of federal income taxes from your personal income. In the same way as business income and expenses, you can use information from prior tax returns or use year-to-date and project to the end of the year.

Getting Help Calculating Estimated Taxes

You can calculate your estimated tax payments by asking your tax preparer to run an estimate, by using the IRS estimated tax calculation worksheet, or by getting a rough estimate from your previous year's return prepared with tax software:

Calculating Estimated Taxes for Partnerships, LLC's, S Corporations

Since owners of partnerships, LLC's, and S corporations are not employees of the business, they receive payments periodically from the business.

These payments are not subject to withholding, so estimated taxes may need to be paid. To calculate estimated tax payments, use the process described above. Your distributions from your business can be estimated from previous years, or you can project the current year from the present forward.

Don't Forget to Include Self-employment Tax

Business owners must also pay self-employment taxes (Social Security and Medicare) on business income. Payments for this tax must be included with the business owner's personal tax return, and these taxes are not withheld from distributions, so you must add estimated self-employment taxes to your calculation of estimated tax payments. To calculate estimated self-employment taxes, use Schedule SE, or get help from your tax preparer.

An example of a calculation for estimated taxes

William Perez, Guide to Tax Planning, has an excellent article with a detailed example of a calculation for estimated taxes.