We at O’Donnell, Ficenec, Wills & Ferdig recently shared with you the many opportunities that are presented with the change of quarters. We referenced how certain classes of taxpayers, including seasonal employers, are subject to quarterly reporting requirements, including estimated tax payments. And, with another quarter in our rearview mirror, we know it is only a matter of time when we are back at square one – with yet another change of quarter, albeit during the frantic holiday season.
So, it is never too early to get ahead of your estimated tax calculations and reporting, and it certainly pays to stay on top of these ongoing processes. Remember: We are your partners in all things financial health and planning. We welcome your questions and can help to ease the burden and sense of overwhelm that occurs as we face down frequent deadlines and an array of compliance reporting requirements.
Not-so-frightful planning for employers
The IRS requires that those taxpayers subject to paying estimated taxes on a quarterly basis use Form 941, better known as the “Employer’s Quarterly Federal Tax Return.” Any party that withholds federal income, Medicare and Social Security taxes during each pay period must file. This means that the majority of businesses will likely need to calculate and report applicable taxes. The form also entails reporting on any wages and tips (as needed), and adjustments to Medicare and Social Security taxes (for the likes of sick pay and group-term life insurance).
Some credits must be accounted for, including those related to qualified small business payroll for R&D, and for qualified sick and family leave wages. The IRS form does not apply to nonpayroll-related payments (think: pensions and annuities, and unemployment taxes). These types of withholdings are instead subject to Forms 945 and 940, respectively. File each and every quarter after the first 941, even if you have zero taxes to report. There are exclusions to this rule, such as for our seasonal employer readers and clients. They don’t have to file during those quarters or periods when no wages were paid, since operations may be discontinued or inconsistent due to the nature of the business. Make sure this distinction is noted when you do file, because the IRS must be aware of any quarters that are excluded from filing due to a lack of tax liability.
Additional exclusions largely apply to:
Businesses who employ farm workers (see: Form 1040, individual income tax return)
Businesses with household workers (such as maids) (see: Form 1040)
Operations that pay no more than $999 in employment tax (Form 944)
Make filing a breeze this fall
Taxes, compliance requirements and reporting are second nature to our team. Our tailored approach to partnering with clients means we can assist as little or as much as you like, and in intervals that fit your needs and schedules. So, our approach is very scalable. If you don’t already have it in place, we can work with you to leverage responsive and intuitive systems and technologies. These tools support and complement our expertise, and that of any in-house employees taxed with these fundamental processes and aspects of your operations. They assure reporting is accurate, complete and on time.
Not unlike other reporting requirements, taxpayers are subject to penalties, including those related to late filings. A good rule of thumb: File no later than one month after the end of each quarter. For the last quarter, the upcoming deadline is October 31 (Boo!). The next quarter’s deadline (Q4, October 1 to December 31) is January 31. Failure to pay the amount due, in totality, by deadline results in a 5% penalty. For each month the return is not filed, the IRS will charge an extra 5%. More details on penalties can be found here.
Individual filing (that won’t haunt your dreams)
As noted, you do not need to represent or own a company to be beholden to quarterly tax requirements. For some individuals, paying estimated taxes on a quarterly basis can make or break their financial health and nest egg, as this approach presents a sound way to stay on track and to ease the burden of owing one large tax bill come April. The implications of not paying a smaller amount throughout the year can be huge; taxpayers may find themselves staring down massive debts or even bankruptcy as a result.
Earlier, we referenced the individual income tax return form (1040). Certain self-employed groups may find it beneficial and, indeed, necessary to divvy up taxes into four pay periods. That way, they do not run the risk of potentially underpaying and owing costly penalties associated with failures to pay taxes outstanding completely and as required. Self-employed parties range from sole proprietors and independent contractors, to gig work or partnerships that carry on trades or businesses.
Remember: The onus for paying applicable taxes falls on you as “your own boss,” and when employers are not calculating, withholding, and reporting taxes on your behalf. Detailed worksheets within forms such as the 1040-ES (Estimated Taxes for Individuals) serve as a guide to pinpoint income, Medicare and Social Security tax. Prior-year tax returns can serve as a baseline, with estimates to follow driven by factors such as current earnings or rates per hour or project. Be sure to also identify and account for any deductions or credits. We at OFWF are seasoned at identifying opportunities for our clients to reduce their tax burdens. Contact us sooner rather than later to not miss out.
For those who are self-employed for the first time, if estimates of earnings are too high, another form can be completed to recalculate estimates for the succeeding quarter. The same “recalibration” can be completed when earnings calculations are too low among first-timers. As the first-timer evolves into a seasoned pro, prior-year liabilities may also function as a “baseline.” Depending on if earnings have ticked up or down, the total tax liability may be modified to account for income fluctuations. From there, new credits can be factored into the updated estimated tax calculations.
Don’t fear the taxman
For all taxpayers, we cannot stress the importance of maintaining organized records that are complete and easy to retrieve. Additionally, there is no substitute for professional expertise, be it on an ongoing basis or to assure your business gets off to the right start with the right system, software, processes and procedures in place. Getting a handle on the inevitable presents a tremendous source of relief and allows you to finally rest easy. With foresight and organization, too, the wheels can be put in motion to request support – such as payment plans or deadline extensions. By scaring up consistent on time, accurate quarterly payments, your overall financial health gets a tremendous lifeline. Quarter-on-quarter planning allows for you to get into the habit of setting aside retirement savings or “buckets” to aid in realizing the goals that make life worth living, such as that special trip, or dream car or property.
Another quarterly deadline is fast approaching. Do you know where your estimated taxes stand? If the very thought sends shivers up your spine, we are here to help! Contact the experienced tax professionals at OFWF today.