March 18, 2022
Corporations must generally make estimated tax payments if they expect their estimated tax (income tax less credits) to be $500 or more. The payment amounts are determined by current year’s tax, previous year’s tax, or annualized income. The corporation will be subjected to penalties and interests if the corporation fails to make enough estimated tax payments or pay late.
Two primary methods for estimated tax calculations
There are four methods of calculating a corporation’s estimated tax payments, while two are considered primary methods. A company can use the method which results in the lowest installment payment. The first method requires that each installment payment equals 25 percent of the corporate tax on the current year’s tax return. If the corporation does not need to file a tax return for the current year, each installment payment is 25 percent of the corporate tax of that year. Under the second method, each installment payment equals 25 percent of the corporate tax of the previous tax year. However, a corporation needs to satisfy the following conditions to use the second method:
The corporation filed a tax return for the previous year;
The return was for a full year;
The corporation is not a large corporation (see below); and
The tax liability was not zero.
Large Corporations
Large corporations may use the prior’s tax year method only for the first installment. The rest of the installments must be computed based on the estimated current year’s tax liability and any underpayment in the first installment must be paid with the next installment. A large corporation has modified taxable income over $1 million or more for any of the three immediately preceding tax years.
Annualized income installment method and adjusted seasonal installment method
A corporation may lower the installment payment by electing to use annualized income installment method or seasonal installment method. If it can use both methods, it can choose to use the one which results in the lowest installment amount.
Annualized Income Installment Method. With this method, a corporation can annualize its actual income based on a given number of months for the tax year to determine its installments payment. There is a standard method and two optional methods (optional monthly periods). A corporation needs to make the election if it wants to use one of the two optional methods.
The standard and optional sets of monthly periods are as follows:
If a corporation uses the annualized income installment method, it will calculate the estimated tax liability based on the annualized income at the current tax rate. It then multiplies the estimated tax liability with the applicable percentage for each installment shown in the table below:
Adjusted Seasonal Installment Method. With this method, a corporation can consider normal seasonal fluctuations to determine its installment payments. A corporation can only use this method if its base period percentage for any six consecutive months of the tax year equals or exceeds 70 percent. The base period percentage is calculated by dividing the corporation’s taxable income for the corresponding months in each of the three preceding tax years by its taxable income for the three preceding tax years. If the corporation does not have taxable income for the corresponding months, its taxable income for this purpose is zero.
Deadline for estimated tax payments
Estimated taxes are payable in four installments. The installments are generally due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any due date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day. Please see below the estimated tax due dates of corporations with the calendar year-end.
April 18, 2022 – Deadline for 2022 Q1 estimated tax payments
June 15, 2022 – Deadline for 2022 Q2 estimated tax payments
September 15, 2022 – Deadline for 2022 Q3 estimated tax payments
December 15, 2022 – Deadline for 2022 Q4 estimated tax payments
The method of payment for Estimated tax
Corporations can schedule the estimated tax payments through Electronic Federal Tax Payment System (EFTPS). EFTPS is a free service from the U.S. Department of the Treasury. All federal taxes can be paid using EFTPS. To register and get more information, please visit www.eftps.gov. If a corporation uses EFTPS to make the payments, the payments must be initiated by 8 p.m. Eastern time the day before the due date. If you make a payment on the due date, it will be considered delinquent, so please remember that you pay one day before the due date.
If a taxpayer doesn’t want to use EFTPS, it may also schedule an electronic fund’s transfer through tax professionals, financial institutions, payroll services, or other trusted third parties. Please check with those organizations for the deposit due dates if the corporation chooses to use those third parties for the payments.
Underpayment Penalty
The taxpayer will be subjected to penalties and interests if no payments are made when the installments are due, or the estimated taxes are underpaid. There will be no penalty if the total tax liability on the tax return is under $500. The penalty is calculated by multiplying the underpaid amount with the interest rate for the time the payment is late.
Quick Refund of Estimated Taxes
A corporation may apply to a quick refund of estimated taxes if it overpays the taxes during the year. The overpayment must be at least 10 percent of the estimated tax liability and more than $500. The overpayment is the amount of total estimated taxes paid during the year over the final tax liability reported on the tax return for the year. A corporation can apply for a quick refund by submitting Form 4466, Corporation Application to Quick Refund of Overpayment of Estimated Tax.
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