Self-employed people and owners of partnerships, limited liability companies, and S corporations pay tax on their business income on their personal income tax returns. To cover this tax liability, they must make quarterly estimated tax payments; falling short on tax payments can result in a tax penalty. With many businesses struggling, owners should reconsider what they advance to the government via estimated tax payments.
Paying the least amount required to avoid penalty puts more money into owners' pockets now. No penalty will apply if tax payments throughout the year---estimated tax payments as well as withholding on wages (perhaps the wages of an owner's spouse)—meet either of these safe harbors:
- Estimated tax payments are at least 90% of the tax bill for 2009, or
- 100% of the tax bill for 2008 (110% if adjusted gross income in 2008 was more than $150,000 or $75,000 if married filing separately).
Minimize payments by basing estimates on last year's taxes if you think 2009 may be a better year; use the current year rule if you think 2009 will shape up to be worse for you than 2008. For example, if you expect 2009 to be a loss year for your business and you use the current year safe harbor rule, you may owe little or no estimated taxes this year.
If you do owe estimated tax payments, they can be charged to a major credit card, although this can be a pricey option. There’s a 2.49% convenience fee paid to the IRS-approved credit card processor (Official Payments Corporation or Link2Gov Corporation) as well as any interest to the credit card issuer if the balance isn't paid in full when due.
Even if estimated payments fall short of these safe harbors, the cost of an estimated tax penalty today is low. The current interest rate used to figure the penalty is only 5%; the rate resets quarterly.