Corporate Income Tax Estimates: What You Need to Know

January 1, 2023

Tax estimates

Tax estimates

As a business owner, it’s important to stay on top of your tax obligations. One of these obligations is paying estimated taxes. In this article, we’ll discuss what corporate income tax estimates are, who must pay them, and two methods for calculating them.

First, let’s start with the basics. Corporate income tax estimates apply to entities that file as C-corporations (federal tax form 1120). Throughout the year there are 4 installment payments made to the IRS to cover the company's expected tax liability for that year. These payments are typically due on the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. For calendar year taxpayers the due dates are April 15th, June 15th, September 15th, and December 15th. Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.

Now that we know what corporate income tax estimates are and when they’re due, let’s discuss two methods for calculating them based on IRS Publication 542. Both of these methods can be calculated using Form 1120-W (see screenshot of the form below).

Method 1: Each required installment is 25% of the income tax the corporation will show on its return for the current year. This method for calculating corporate income tax estimates is based on the corporation’s expected tax liability for the current year and this method can be used by all corporations.

If Method 1 is used, corporations can take the “net profit before taxes” line from their Finaloop P&L as of the last day of the month preceding the next estimated due date as a starting point for the calculations. Make sure to set the correct date range. Before using this number though, you should make sure that the books are up to date. This includes ensuring that all transactions from banks/CCs are properly classified and that COGS is up to date.

Additionally, since book amounts can have some variances from tax amounts, some additional adjustments may be needed. The most common adjustments for e-commerce businesses based on the Finaloop P&L are:

Net profit before taxes
+
Meals Finaloop P&L x 50%
+
Entertainment from Finaloop P&L x 100%
+
R&D expenses from Finaloop P&L x 90%
+
Any salaries or fees paid to R&D consultants or R&D employees x 90%
=
Estimated income before annualization


Since Form 1120-W is based on the annual expected tax liability, if your business generally operates consistently throughout the year, you should annualize all of the relevant amounts in the calculation. Once these adjustments are taken into account you now have the corporation's expected taxable income.


For instance, for Q2 estimates (June 15th), run your Finaloop P&L between January 1 and May 31. After making the adjustments mentioned above, annualize the result by dividing it by 5 and multiplying it by 12.

You can also use this calculator to make the adjustments:

You can now complete form 1120-W yourself with these step-by-step instructions:


  • Lines 1 and 2: Take your corporation’s expected taxable income (as you calculated above) or the "estimated annualized taxable income" line from the "your estimates result section of the tax calculator" and multiply it by 21%, which is the current flat tax rate for corporations.
  • Line 3: Take into account any tax credits that your corporation is eligible for.
  • Line 4: Subtract line 3 from line 2.
  • Line 5: Include any other taxes that may apply, such as the base erosion minimum tax amount and recaptured tax credits (generally not relevant for many e-commerce businesses).
  • Line 6: Add lines 4 and 5.
  • Line 7: Add any applicable tax credits for federal taxes paid on fuels and other refundable credits (generally not relevant for many e-commerce businesses).
  • Line 8: Subtract line 7 from 6. If the amount is less than $500, no estimated taxes are required.
  • Line 9a: Enter the total tax liability for the prior year (Form 1120). If the tax is zero or the tax year was for less than 12 months, skip this line and enter the amount from line 8 on line 9b
  • Line 9b: Enter the smaller of line 8 or line 9a on line 9b.
  • Line 10: Will show the installment due dates.
  • Line 11: will show the installment amounts (each installment is 25% of the total amount on line 9b).

Method 2: Each required installment is 25% of the income tax shown on the corporation's income tax return from the previous year. This method can only be used if the following 3 criteria are met:


  1. The corporation must have filed a return for the previous year,
  2. The previous year's tax return must have been for a full 12 months, and
  3. The previous year's return must have shown a positive tax liability of $500 or greater.

Generally, a populated Form 1120-W is provided along with a copy of the prior year's tax return to corporate taxpayers who owed more than $500 in tax in the previous year. Since the tax estimates have already been calculated on this form, they can be used for the current year's tax estimates for each due date. See lines 10 & 11 on the form for the installment due dates and amounts respectively.

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How to pay corporate estimated federal taxes online:

Whether method 1 or 2 is used, the payment of the estimated tax can be paid online through the IRS' electronic federal tax payment system (EFTPS).

Here are the steps to enroll in EFTPS and pay corporate tax estimates (if you already enrolled in EFTPS - skip step 1):


  1. Enroll in EFTPS: To use EFTPS, you must first enroll. You can do this by visiting the EFTPS website and clicking on the “Enrollment” button. Follow the prompts to complete the enrollment process. After enrolling in EFTPS, you will receive your Personal Identification Number (PIN) in the mail (at your IRS address of record) within five to seven business days. If you have not received your EFTPS PIN within this time frame, you can call EFTPS Customer Service at 1-800-555-4477 for assistance.
  2. Log in to EFTPS: Once you have enrolled, log in to your EFTPS account using your Taxpayer Identification Number (TIN) and Personal Identification Number (PIN).
  3. Select payment type: After logging in, select “Make a Payment” from the main menu. Then, select “Form 1120” as the tax form and “1120 Estimated Tax” as the tax type, and then enter the tax period for which the payment is being made.
  4. Enter payment information: Enter the amount of your estimated tax payment and select the date you want the payment to be made. You can schedule payments up to 365 days in advance.
  5. Review and submit: Review your payment information to ensure that it is correct. Then, submit your payment.
  6. Confirmation: After submitting your payment, you will receive a confirmation number. Keep this number for your records as proof of payment.

By following these steps, you can easily make corporate tax estimate payments through EFTPS.

What happens if tax estimates are not paid or are underpaid? If a corporation does not make estimated tax payments when due or if its payments are not sufficient to cover its tax liability, it may be subject to an underpayment penalty. This penalty is calculated using Form 2220, Underpayment of Estimated Tax by Corporations.

The underpayment penalty is calculated based on the amount of the underpayment and the period of time that the underpayment remains unpaid. The penalty is generally calculated at an annual rate that is determined by the IRS and can change each quarter. For example, for the first quarter of 2023, the announced rate for corporate underpayments it is 6%. In addition to the underpayment penalty, interest may also accrue on any unpaid tax liability. The interest rate is also determined by the IRS and can change each quarter. It’s important to note that these rates are subject to change and may vary depending on the specific circumstances of the corporation. It’s a good idea to refer to the IRS website for the most up-to-date information on underpayment penalties and interest rates.

If you have state or local tax (city for example) nexus (significant connection to the state) and owed tax last year or expect to owe this year, you may also be required to file state income tax estimates. If your prior year tax return was already filed an estimated tax schedule with due dates and amounts should have been provided to you, if relevant, and you can file based on those amounts. If you did not pay state tax last year but expect to owe this year you can get a ballpark estimate of how much tax you should pay for estimates by using the calculator above and in the "Select tax type" field, select "State income tax". For current year estimates, some states have specific rules for how to apportion the income to their state when calculating the tax liability. These differ per state. In order to pay estimated corporate state tax, log into your account on the state or city website (if you don't have an account you will need to create one). As an example, to make an estimated payment for New York state corporate tax, go to tax.ny.gov, log into your online services account (or create an account if you don't have one), click payments, and then follow the prompts to make your estimated payment.

In conclusion, corporate income tax estimates are an important part of managing your business’s tax obligations. By understanding what they are and how to calculate them, you can ensure that your business stays compliant with IRS regulations.

About Finaloop

 

We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data and reconciles your books in real-time, replacing your bookkeeper, your accounting software, and your ecomm integrations. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.

 

*The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.*

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