Corporations pay income tax during the year, not just when they file. A SaaS company that turns profitable, or whose net operating losses run out, can find itself owing an underpayment penalty even though the return is filed on time. Knowing the dates and the safe harbors avoids it.
Who must pay
A corporation generally makes estimated payments if it expects its tax for the year to be $500 or more. The underpayment penalty under Section 6655 does not apply if the tax shown on the return is less than $500.
The four installments
For a calendar-year corporation, installments are due on the 15th day of the 4th, 6th, 9th and 12th months of the tax year:
| Installment | Calendar-year due date |
|---|---|
| First | April 15 |
| Second | June 15 |
| Third | September 15 |
| Fourth | December 15 |
Each installment is generally 25% of the required annual payment.
The safe harbors
A corporation avoids the penalty if it pays, on time, at least the smaller of:
- The tax shown on the current year's return, or
- The tax shown on the prior year's return, if the prior year was a full 12-month year and showed some tax.
Large corporations (taxable income of $1 million or more in any of the three prior tax years) can use the prior-year amount only for the first installment. The remaining installments must catch up to the current year's tax.
Methods that follow the income
SaaS revenue often grows through the year. Two methods let installments track income rather than assuming it is earned evenly:
- Annualized income installment method: income earned through each period is annualized and the installment is based on that figure.
- Adjusted seasonal installment method: for businesses with a recurring seasonal pattern.
Both are computed on Form 2220.
A worked example
A calendar-year corporation owed $40,000 for last year and expects $140,000 this year. It has never had $1 million of taxable income.
| Option | Required annual payment | Each installment |
|---|---|---|
| Prior-year safe harbor | $40,000 | $10,000 |
| Current-year 100% | $140,000 | $35,000 |
Paying $10,000 per quarter avoids the penalty; the remaining $100,000 is due by the return's original due date. Cash planning should reserve for it all year.
The penalty
The penalty is figured separately for each installment, based on the amount underpaid and how long it stayed unpaid, at the IRS underpayment interest rate. Generally the IRS computes it and sends a notice; a corporation uses Form 2220 to show it qualifies for a lower amount (for example, under the annualized method).
States
Most states with a corporate income tax have their own estimated payment rules and dates, often matching the federal ones but not always. Track them in the same calendar.
We forecast taxable income from the monthly close, set each installment, schedule the deposits, and include the reserve in the cash forecast.
Sources
- IRS, Instructions for Form 2220, Underpayment of Estimated Tax by Corporations
- IRS, About Form 2220
- IRS, Estimated taxes
- 26 U.S.C. §6655, Failure by corporation to pay estimated income tax (Cornell LII)
- EFTPS, Electronic Federal Tax Payment System
Questions founders ask
Does a loss-making startup need to make estimated payments?
Generally no, because estimated payments are required only when the corporation expects to owe tax. Once the company becomes profitable or uses up its net operating losses, they start to matter.
How are corporate estimated payments made?
Corporations generally deposit tax electronically, most commonly through the Electronic Federal Tax Payment System (EFTPS).
