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Estimated Tax Payments, Withholdings Issues

Article ID: 309
Last updated: 24 Nov, 2018
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By Jason Watson ()
Posted November 23, 2018

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. If you earn over $150,000, you must pay 110% of your current year tax liability. How do you keep that straight?

Here is some more Watson CPA Group elegance- we calculate and pay your quarterly estimated payments through payroll. No more writing separate checks and tracking due dates. We do this by manually entering your Federal and State withholdings accordingly to reflect the tax liability for your W-2 income and your K-1 income. Beauty!

For example, we will use a net business income before shareholder salaries $150,000 and a reasonable salary of $54,000. We would also review your previous tax returns, determine the amount of income taxes you paid and deduct other withholding sources (spouse W-2, pension payments, etc.).

Here is a summary from our internal work paper-

Taxable Income

184,718

Tax Calculation

38,606

Less Other Withholding Sources

-8,000

Tax Deficit

30,606

Less W-2 From S Corp

-31,000

Less Estimated Tax Payments

0

April Tax Obligation (Federal)

-374

What the heck are we showing you here? The taxable income is making some assumptions such as spousal income, itemized deductions, exemptions, etc. The $184,718 is just a number. Please accept as is.

The tax related to this income is $38,606 according to a simple tax table and your spouse has withheld $8,000 on his or her W-2. The resulting deficit in this example is $30,606. If we simply entered $54,000 into the payroll system and let the computer figure out the withholdings it might come up with $7,000ish. This would be a tax surprise in April since you would owe $23,000ish. Yuck. Bad news is OK. Surprises are bad.

Therefore we increase your W-2 withholdings to account for your K-1 income, but this only fixes your isolated business  income. It doesn’t address the possible increased marginal tax rate when three sources of income (your W-2, your K-1 and your spouse’s W-2) are combined. Individually each source of income is withholding correctly, but when aggregated it blows up.

Think of it this way- you make $150,000 and your spouse makes $60,000. When your spouse’s employer computes tax withholdings, the payroll system does not understand that the household income is $210,000. It can only make basic assumptions. In this disparity, even if the $60,000 spouse claims 0 exemptions on a W-4, the taxes withheld will not be enough when combined with the $150,000.

As a result, we compute your household tax liability and subtract external withholding sources to determine the amount of tax to be withheld from your S Corp payroll. No more estimated payments (usually). No more underpayment penalties. This is a nice way of reducing some chores in your world.

Unemployment and Workers Compensation
We addressed these issues in a previous chapter. Please review. Here is a summary of the topics-

  • FUTA and SUTA- unemployment tax. Unavoidable. You might be able to opt out, and as the Minnesota example in an earlier chapter illustrates, there is a tax savings.

  • SDI- state disability insurance. Might be able to opt out for single-owner corporate officers such as California and New York.

  • Workers Compensation Insurance- has nothing to do with unemployment or state disability insurance, and is not interchangeable with those terms. This is purely insurance coverage for on the job injuries and is provided by private insurance such as State Farm, All State, Farmers, etc. Ask your local insurance agent if you can opt out. Typically you can since you don’t plan no suing yourself for a paper cut or a rogue paperclip stabbing.

Taxpayer's Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

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www.watsoncpagroup.com/book

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