As the deadline passes for payment of income tax on last year’s income, immediate attention should be directed at addressing tax on income that’s being earned this year. The government imposes penalties when income tax is not remitted throughout the year. Although wage-earning employees satisfy this obligation through paycheck withholding, entrepreneurs are confronted with the duty of making their own calculations and sending estimated tax payments. The first of these payments for this year is due on the same date as the deadline for last year’s tax return.
This year’s estimated tax amounts are ideally determined from a projection of business income. This is easily identified if you prepared a current-year business budget. At the very least, projected income for this year can be derived from your taxable business income from last year. Simply identify whether you expect to generate more or less income than last year. A common expectation is that this year will be about the same. Your tax accountant can calculate estimated tax payments for this year based on the expected business income and your other income sources.
Two other methods for determining estimated tax installments are available. One is a complex form with your next tax return that shows your income during different periods throughout the year. Tax accountants can prepare it only if you maintain burdensome records. The other technique entails paying this year an amount of tax equivalent to last year. Even if you make substantially more income this year, you escape an underpayment penalty by making estimated tax payments your accountant identifies based on last year’s taxes.