Do You Need to Make an Estimated Tax Payment?

If you are an employee, you probably have taxes withheld from your paycheck and never have to worry about making quarterly estimated tax payments. However, if you are self employed and don’t have any taxes withheld, or you don’t have enough tax withheld as an employee, you may need to make estimated tax payments throughout the year to avoid costly penalties.

You should pay estimated taxes if you expect to owe at least $1,000 in tax for the 2016 tax year, after subtracting your withholdings and refundable tax credits.  Even if you owe more than $1,000 when you file your 2016 tax return, you can keep yourself safe from penalties if your total withholdings and timely estimated tax payments equal at least 90% of your 2016 tax, or 100% of your 2015 tax (110% if your 2015 income exceeded $150,000).

You normally make estimated tax payments four times a year. The dates that apply to most people for 2016 are April 18, June 15 and Sept. 15. There is one last payment on Jan. 17, 2017. 

If you filed your 2015 tax return with AA Tax CPA and owe estimated tax payments, we included vouchers to mail to the IRS with payments throughout the year. Federal estimated tax payments can also be paid online at www.irs.gov/payments.

IRS Requirement to Take Compensation as an S Corp Owner

Why S Corp Owners Need To Be On Payroll

If you’re a business owner, it’s common to think you can pay yourself whatever you want, whenever you want. It’s your business after all, right?

The reality is not so simple if your business has elected S Corporation status with the IRS, and you perform services for your business. The IRS actually requires that active S Corporation owners take “reasonable compensation” and report their wages on a Form W-2 at year-end.

Why Does the IRS Care?

As an S Corp owner, you are not required to pay Social Security and Medicare taxes on your distributions.  But you are required to pay these taxes on a W-2 salary. The IRS wants to collect these taxes on your compensation.

Your services to your S Corp are done as an employee, for which you should be paid a wage. You may continue to take owner distributions as a result of profit generated by the company, but only after paying yourself a reasonable wage.

What Is Reasonable Compensation?

This is an important term to know. The IRS expects you to pay yourself a market value salary for your services.  Consider what you would pay someone else to do your job for you. This salary amount can be based on market data, industry norms, and your own experience. This remains a grey area, and AA Tax CPA can help you determine a reasonable salary.

What’s the Worst that Could Happen?

The biggest risk you can take as an S Corp owner-employee is to take no salary at all, especially while collecting tax-free owner distributions. This is a red flag for the IRS and increases your chance for an audit. If faced with an audit, the IRS can reclassify ALL of your distributions (and more) as wages, thus requiring more Social Security and Medicare taxes to be paid, not to mention steep penalties and interest. Therefore it’s best for you to be proactive and decide your own reasonable salary.

Need More Time to File Your Taxes?

The April 18 tax deadline is coming up. If you need more time to file your taxes, you can get a six-month extension from the IRS.

More time to file is not more time to pay. An extension to file will give you until Oct. 17 to file your taxes. It does not, however, give you more time to pay your taxes. Estimate and pay what you owe by April 18 to avoid a potential late filing penalty. You will be charged interest on any tax that you don’t pay on time. You may also owe a penalty if you pay your tax late. Interest is normally charged on any unpaid tax.

If you need an extension, but think you might owe tax for 2015, contact AA Tax CPA today for help!

March 15th: Corporate Tax Deadline

The deadline to file your calendar year 2015 corporate tax returns (forms 1120 and 1120S) is Tuesday, March 15th, 2016.  With only 2 weeks remaining before the deadline, it is important to contact your CPA right away to discuss your filing options.  If you require more time to file your corporate return, you can request a 6-month extension by filing Form 7004 before the March 15th deadline. Penalties for failing to file or extend your corporate tax returns can be up to 25% of the unpaid tax for an 1120 and $195 per shareholder per month for an 1120S.

The March 15th corporate deadline also applies to businesses that would like to file an election to be taxed as an S-Corporation on Form 2553.  AA Tax CPA can help you determine if this option is best for your business, and can file the election for you if doing so is in your best interest.