Tax
For an owner-operated business the personal return is where the entity return finally settles. We file both, so the K-1, the estimates, and the April number are worked as one problem instead of two.
Overview
We are not a volume preparation shop. The individual returns we file are mostly owners, their spouses, and their families — returns where the interesting parts are a K-1 from the operating company, a Schedule E with two or three rental properties, and an estimated-payment calendar that has to track income nobody withholds against.
That changes the work. A return like this is assembled from decisions made across the year, not from a folder of documents in March. When the entity return and the personal return are prepared by the same team, the basis figures, the distributions, the payroll, and the estimates reconcile before anything is filed.
Forms We Prepare
A Decision You Face
An owner whose income arrives as a K-1 has no withholding. Nobody is taking tax out along the way, so the entire liability has to be funded through quarterly estimated payments — and the penalty for getting it wrong is assessed quarter by quarter, not settled at the end of the year.
You avoid the underpayment penalty by meeting one of three tests. Hitting any one of them is enough.
The prior-year safe harbour is the one that protects you in a good year. If the business has its best year ever, paying 110% of last year’s much smaller tax still avoids the penalty. You will owe a large balance in April — but penalty-free, with the cash having stayed in the business all year.
Estimated payments are due April 15, June 15, September 15, and January 15 of the following year. Note that the quarters are not equal lengths — the second “quarter” covers two months and the fourth covers four. Missing that asymmetry is a common way to underpay early in the year and accrue penalty on Q1 and Q2 even after catching up in the autumn.
Owners with genuinely lumpy income — a construction company that collects on a large job in Q4, a retailer whose year is made in December — can use the annualised income installment method instead. It lets the payments track when income was actually earned rather than assuming an even quarterly spread. It is more work to compute and requires the books to be current each quarter, but it stops a seasonal business from having to fund Q1 estimates out of income it hasn’t made yet.
One mechanic worth knowing: tax withheld from wages is treated as paid evenly across the year regardless of when it was actually withheld. An owner who takes a W-2 salary from an S corporation can increase withholding late in the year and have it credited as though it had been paid ratably from January. That can retroactively cure an underpayment that a Q4 estimated payment cannot.
We set the estimate schedule at the July and October planning meetings, recalculate it when something material changes mid-year, and tell you the number to pay rather than leaving you to work it out from a voucher.
Who Runs This
Questions about anything on this page go straight to the person who runs this work — not a contact form queue.
Daniel Cohen, CPA, CFP
Senior Manager, Estate & Trust
[email protected]