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Estimated Tax Payments, Withholdings Issues for an S-Corp
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Estimated tax payments change as well when you have an S-Corp, especially the first year. Generally speaking, you are required to pay at least 100% of your prior year tax liability or 90% of your current year tax liability whichever is lower. And if you earn over $150,000, you must pay 110% of your current year tax liability.
So, when computing your estimated tax liability for the quarter you must include the taxes (income and employment taxes) that will be withheld from your paycheck. For example, your quarterly estimated tax payment is $5,000. If you run payroll, and $2,500 is being withheld for taxes, then you should also send in $2,500 as a quarterly estimated tax payment.
In other words, you are essentially making estimated tax payments in two ways (a) through payroll taxes withheld and paid by the company on your behalf, and (b) through payments made by you personally. We can help with the mental gymnastics.
Here’s some more elegance- we can calculate and pay your quarterly estimated payments through payroll. No more writing separate checks and tracking due dates. If you use WCG (formerly Watson CPA Group) to run your payroll, we can manually enter your Federal and State withholdings accordingly to reflect the tax liability for your W-2 income and your K-1 income. Beauty!
But there is also a pitfall to having W-2 income and K-1 income. Typical payroll tables will withhold taxes based on your W-2 income only, but when combined with your K-1 income, your taxable income might be in a higher marginal tax bracket. In other words, you could withhold correctly on your W-2 income and send quarterly estimated tax payments correctly on your K-1 income, but combined you might have under-withheld.
There are some other devils are in the details especially between first-year S-Corps and established S-Corps. In addition, estimated tax payments can be budgeting tools- if you expect to earn more, you should pay more throughout the year if you aren’t a good saver or hate writing a big fat check on April 15, or both.
Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
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