Are your income tax payments booked as a business expense?

An electrical contractor, two partners, set up as an S corp. January through May of the year before, they did about $61,000 in revenue. This year, same five months, about $200,000.

Good problem. It comes with a tax bill, and the owner asked me the question I hear every time that happens. Is there any reason to pay our personal income taxes through the business?

No. The way his company is set up, the owners’ income tax is not a business expense. Money that leaves the business account for an owner’s IRS or state bill counts as money paid to that owner, the same as any other draw or distribution. It lowers nothing.

Where it goes wrong is the bookkeeping. A payment to the IRS from the business account looks like a tax, so it gets coded to a tax expense account. Now the profit and loss shows less profit than the business made. Your CPA has to find it and back it out. If nobody does, the return deducts something it can’t, and that kind of error comes back with interest.

Payroll taxes and sales tax are different. Those belong to the business and should stay where they are. The ones to look for are the owners’ own income tax payments, estimates included.

The better question was when to pay. In a year where revenue triples, waiting until April means one large bill and an underpayment penalty on top. So the plan was to close June, look at the half year, make an estimated payment in July, and look again in the fall. Pay just enough to avoid the penalty. Overpaying is a free loan to the government.

For most owners, the safe line is to pay in at least what your total tax was last year, or 110 percent of it if your income was over $150,000. The fourth quarter estimate is due January 15.

What to do before year end:

1. Add up the estimated payments you made this year, from any account.
2. Compare that to last year’s total tax. That is your safe line.
3. If you are short, plan the January 15 payment now.

In QuickBooks Online, type IRS in the search bar at the top and open the payments it finds. Look at the account each one is coded to. If an owner’s income tax payment sits in an expense account like Taxes & Licenses, it is in the wrong place. Run the same search for the Utah State Tax Commission.

If you don’t know where those payments went, start the 5-minute intake.