As the June 15 deadline for the 2023 second quarter estimated tax payments looms, the Internal Revenue Service (IRS) has issued a reminder to taxpayers, including self-employed individuals, small businesses, corporations, retirees, and investors, to stay current with their taxes.
The estimated tax is the method used to pay taxes on income that isn’t subject to withholding. It’s typically utilized by those who do not have taxes withheld from their income. This could include people who run their own businesses or receive income from investments.
The IRS operates on a “pay-as-you-go” model, which requires taxpayers to pay most of their expected tax liability during the year, as income is earned. This can be achieved either through withholding from pay, pensions, or certain government payments, or by making quarterly estimated tax payments throughout the year.
For small business owners and self-employed individuals who receive a salary or wages, one strategy to avoid having to pay estimated taxes is to request their employer to withhold more tax from their earnings. This can be accomplished by submitting a new Form W-4, Employee’s Withholding Certificate.
The IRS generally expects individuals, including sole proprietors, partners, and S corporation shareholders, to make estimated tax payments if they anticipate a tax liability of $1,000 or more when they file their returns. Corporations are expected to make these payments if they foresee a tax debt of $500 or more.
Furthermore, changes are being implemented that affect those receiving income through electronic transactions. Starting in 2023, taxpayers who receive over $600 electronically through payment cards or online marketplaces for side jobs, running a small business, or selling items might get a Form 1099-K, Payment Card and Third Party Network Transactions. The threshold for reporting has been lowered, and the forms are typically sent by January 31.
To make estimated tax payments, taxpayers can choose to pay electronically, which is deemed the fastest, most secure method. Payment options include IRS Direct Pay, debit cards, credit cards, digital wallets, or Electronic Federal Tax Payment System (EFTPS). Checks or money orders payable to the “United States Treasury” are also acceptable.
For corporations, all federal tax deposits must be made through electronic funds transfer. This includes installment payments of estimated tax, which are typically made using the EFTPS.
The IRS advises taxpayers to avoid an underpayment penalty by owing less than $1,000 at tax time or by paying most of their taxes during the year. For 2023, this means making payments of at least 90% of the tax expected on their 2023 return, or at least 100% of the tax shown on their 2022 return.
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This article, “IRS Reminds Small Business Owners of Pending Estimated Tax Deadline” was first published on Small Business Trends