Estimated Taxes for Startups and Their Founders: Why they Can’t be Ignored
Startup founders are swamped with tasks—product development, fundraising, team building, and customer acquisition to name a few. Taxes might seem like a low priority, something to tackle “later.” But ignoring estimated taxes can lead to costly penalties and financial stress that no startup can afford.
Estimated Taxes for C Corporations
Estimated taxes are quarterly payments due to the IRS and to the states in which a C Corporation does business, assuming that the corporation expects to make a profit. The corporation must make these payments quarterly to avoid penalties and interest. The federal deadlines typically fall on April 15, June 15, September 15, and January 15 of each year. For the states, business owners will want to check the website of their state’s tax authority for state-specific deadlines.
How to Calculate and Pay Estimated Taxes
Calculating estimated taxes for a C Corporation involves projecting the corporation’s taxable income for the year, which includes gross receipts less allowable deductions.
The IRS expects all taxpayers to make total payments for the year of at least 100% of the tax owed from the previous year or 90% of the current year’s tax liability (whichever is smaller) to avoid penalties.
Estimated Taxes for Flow-Through Entities
For businesses structured as sole proprietorships, partnerships, or S Corporations, owners must consider whether their business activities require them to make estimated tax payments personally. Individuals often must pay estimated taxes as a result of income that is not subject to withholding, such as income from a business (e.g., pass-through income or sole-proprietor income), guaranteed payments from partnerships, or investment income.
An additional consideration to keep in mind is whether a partnership or S corporation has made a “pass-through entity tax” (PTET) election at the state level. Some states allow flow-through entities to make a PTET election, which requires the entity to accrue and pay state taxes at the entity level. If this situation applies, then the entity may also need to consider making estimated tax payments to the state if it expects to have positive taxable income for the coming year.
These added complexities require accounting for self-employment taxes, personal deductions, and other income sources. In these cases, consulting a tax professional is critical to ensure accurate calculations and compliance.
Why Estimated Taxes Cannot be Ignored
Ignoring estimated taxes can jeopardize a business’ financial health. Penalties, interest, and unexpected tax bills can strain cash flow, especially in the early stages of a business when every dollar counts. Beyond the financial hit, tax issues can distract owners from their core mission—building the business. By working with a tax professional and staying proactive, businesses can avoid these pitfalls and focus on growth and success.
