Quarter 2 Estimated Tax Payment Is Due June 15
I will be writing a series of articles concerning the taxation of small businesses. This will generally cover sole proprietors. If you are unsure how any of this pertains to your situation, please contact your tax advisor. If you are one of our clients, please call our office with any specific questions.
Our first topic in the series will be making estimated payments. Since June 15 is next week, let’s talk about the second quarter estimated tax payment.
Should I make an estimated tax payment?
You may ask, “Do I have to make an estimated tax payment?” The easy answer is that if you own a business and it shows a profit, you should probably make an estimated tax payment. (My goal is to make this a simple calculation. You can go to the IRS website and see the mathematical requirements for estimated payments, or my clients can call our office for calculations of their individual taxes.)
The US tax system is a “pay as you go” tax system. Depending on your balance due at the end of the year (when you file your taxes), you may owe penalty and interest to the IRS and to the state for failure to make estimated tax payments. The calculations take place on the IRS form 2210 and GA form UET. These forms may not always show up in your tax packet so take a look at your tax return. For tax year 2021, see line 38 on the 1040, and line 40 on the GA500. It will state if you paid a penalty for 2021. Some of my clients consider this “not much,” but some of my clients are appalled that they are subject to a penalty at all.
How much should I pay?
The next question will be, “How much should I pay?” Start with your total income for your business for the second quarter (April-May). Hopefully you have a listing of your expenses for April and May, as well as your mileage logs. (Quickbooks helps keep track of your income and expenses but if you don’t use that, you can use a computer spreadsheet, another online software, or even just a notebook.) Figure the mileage deduction (58.5c per mile for January through June of 2022, and 62.5c per mile for July through December 2022). Subtract the regular deductible expenses and mileage expense from the gross receipts and you come out with the tentative net profit. (Future blog posts will discuss deductible expenses in depth.)
Total income – deductible expenses – mileage expense = tentative net profit
There are other issues involved with these calculations. Standard deduction, depreciation, home office, QBID, other income, filing status, credits… Our goal here is to make an ESTIMATE of the tax liability on your business income. We are estimating the amount of tax we expect to calculate on the business when your return is filed. We want to get as close as possible to owing $0 in April.
Three kinds of tax…
This tentative net profit is subject to three kinds of taxes.
- Self-employment tax
- regular federal income tax
- regular state income tax
(Always check your state’s tax laws. You may be subject to other taxes such as sales tax and local tax. We are simply discussing Schedule C business income tax right now.) Self-employment tax is the Social Security and Medicare which equals 15.3% (on income up to $147,000). Federal tax is a little more complicated to figure because taxpayers will fall into different tax brackets depending on their income and filing status. I will include a chart below. Georgia state tax is also a bracket system, but most people fall into the 5.75% tax bracket. When you figure deductions, most taxpayers should pay about 5%. (Remember, this is just an estimate. Talk to your tax preparer for a more accurate figure.)
Federal estimate = Self-employment tax + federal income tax
= (tentative net profit x .153) + (tax based on the chart below)
GA estimate = tentative net profit x .05 (up to .0575)
Steps to figure the federal income tax portion of your estimate:
- Divide the tentative net profit for the quarter by the number of months in the quarter (Did you notice there are only two months in the second quarter according to the IRS?)
- Find the answer to #1 in the chart below. This will give you a monthly estimate.
- Now you have to multiply the answer to #2 by the number of months in the quarter.
- Finally, add the self-employment amount (tentative net profit x .153)
Now that we have our estimate figures, you can visit the tax websites to make the payments. For federal payments, go to the IRS website, www.irs.gov and choose “Make a Payment.” Be sure to choose the correct year and quarter to which you want your payment applied. You can also set up your own account for easier future payments.
For GA payments, visit the Georgia Tax Center (ga.gov). You can “Make a Quick Payment,” or set up an account if you want your information saved for the next payment.