June 15th is the next deadline to make quarterly tax payments. If you're a business or individual who must pay, now is an excellent time to review the way corporate federal estimated payment calculations work. Your goal is to minimize your business's estimated tax liability without getting dinged with an underpayment penalty.
Four ways to calculate
To avoid an estimated tax penalty, corporations must pay an installment based on the lowest amount calculated by one of the below four methods:
Preceding year method
Corporations can circumvent underpayment penalties on owed estimated tax by paying 25% of their preceding year's tax according to the four payment due dates on their return. In 2022, some corporations are limited to only using this method for calculating their first payments if their taxable income was $1 million or more in any of the previous tax years. Also, if your corporation's previous tax return covered less than twelve months or you filed a return that didn't have any tax liability, you won’t be eligible to use this method.
Current year method
Your corporation can pay 25% of the current year's tax to avoid an estimated tax underpayment penalty. Just make sure to make these payments according to the installment schedule on your return. For example, if you didn't file a return at all, you’ll pay 25% of this year's tax. The installment due dates typically fall on the 15th of April, June, and September of the current year and January 15th of the next.
Seasonal income method
Corporations with taxable income that follows recurring seasonal patterns can annualize their income by assuming earnings for the current year will follow the same pattern as previous years. A mathematical formulation is used to test a corporation's eligibility for this method by establishing their seasonally patterned income. If you believe your company qualifies to use this method, you’ll want to ask for qualified assistance to ensure that it does.
Annualized income method
When using the annualized tax method, quarterly installments are made based on the computation of taxable income for the months in the tax year ending before the installment is due. This is achieved by assuming that any earnings received will be at the same rate throughout the year.
Additionally, corporations aren't limited to one method for the entire tax year and can switch among the four as needed.
If you have questions about how your estimated tax bill can be reduced, contact us to set up a review of your corporate tax situation.
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