C Corp Estimated Tax Payments in a New Corporation's First Year

Does a new C corp have to make estimated tax payments in its first year?

Yes, if it expects federal tax after credits of $500 or more for the year (IRS: Publication 542; IRS: Form 1120 instructions). There is no first-year exemption. The main first-year break: a first tax year shorter than 4 full calendar months needs no estimated payments (26 CFR 1.6655-5).

A first year gets harder when it starts mid-year (fewer, larger payments), when profit arrives late (lower early payments need each period's profit from the books), when a state adds its own estimates, or when an IRS penalty notice has already arrived.

Gather the date the first tax year started, the year-end the corporation will use, profit by month so far, every payment made with its date and confirmation, and any IRS notice.

Why is there no prior-year safe harbor for a C corp in year one?

A corporation may base its payments on last year's tax only if it filed a return for a prior tax year of 12 months that showed some tax. A new corporation has no such return, so its payments must cover the tax for the current year (26 U.S.C. 6655(d)).

The shortcut often stays closed in year two. If the first year was shorter than 12 months, which it is whenever the corporation started after the first day of its chosen year (after January 1 for a calendar year), or showed no tax because of a loss, year two must also use current-year tax (IRS: Form 2220 instructions).

Current-year tax means the full tax shown on the return. Individuals can rely on paying 90% of this year's tax; a corporation has no such cushion. See quarterly estimated tax for individuals for the personal rules.

How much is each C corp estimated tax payment?

Each regular installment is 25% of the required annual payment, which for a new corporation is the tax it will show on its first return. Form 1120-W is now historical; the worksheet in Publication 542 replaces it.

1. Estimate taxable income for the year: income less deductible expenses, including salaries paid to the owners.
2. Multiply it by the federal rate of 21% (IRS: Form 1120 instructions).
3. Subtract credits and add any other taxes the return will show.
4. If the result is under $500, no payments are required.
5. Divide the result by the number of due dates in the year: four in a full year, fewer in a short first year (26 CFR 1.6655-5).

Each installment is measured against the tax the return finally shows, not against the estimate. If profit runs higher than planned, Publication 542 says to refigure the installments and make an immediate catch-up payment; the penalty on earlier shortfalls keeps running until they are paid (IRS: Publication 542).

When are C corp estimated tax payments due in a short first year?

Installments fall on the 15th day of the 4th, 6th, 9th and 12th months of the tax year: April 15, June 15, September 15 and December 15 for a calendar year, moved to the next business day after a weekend or legal holiday. A first year that starts mid-year keeps the regular dates for its year-end but drops any date before the 15th day of its fourth month, counting the starting month as month one, and splits the year's tax evenly over the dates left (26 CFR 1.6655-5; 26 CFR 1.6655-1).

For a corporation with a December 31 year-end:

A fiscal-year corporation applies the same test to the 15th day of the fourth, sixth, ninth and twelfth months of its fiscal year. A new corporation that has not settled its year-end may pay on calendar-year dates until it files its first return; choosing a fiscal year on that return does not create a penalty for having used calendar dates (26 CFR 1.6655-5).

Any tax left after the estimates is due by the return's original due date, April 15 of the following year for a calendar year; an extension gives more time to file, not to pay (IRS: Publication 542). When the first year starts and when its return is due are covered in the first tax year of a new company.

Profit came late in the year: how does the annualized income method lower early payments?

If profit arrives unevenly, the annualized income installment method can lower the early installments. Each installment is figured from the profit earned so far, projected to a full year: the first and second installments use the first 3 months, the third uses 6 months and the fourth 9 months. The tax on that projected profit is multiplied by a growing share (one quarter, half, three quarters, then all of it), less the installments already required, and the corporation pays the lower of that amount and the regular installment (26 U.S.C. 6655(e)). A short first year also scales the tax to its months and uses one third, two thirds and all of it with three due dates, or half and all of it with two (26 CFR 1.6655-5).

• The corporation claims the method by attaching Form 2220 to its return, using its Schedule A for every due date (IRS: Form 2220 instructions).
• An amount skipped on one date is added to the next regular installment, unless the annualized amount for that date is still lower (26 U.S.C. 6655(e)).
• Each period's profit must be supportable from the books. To pay the lower amount on the due date itself, the corporation needs that period's profit by then, which takes books kept current.
• Form 8842 elects other periods (2, 4, 7 and 10 months, or 3, 5, 8 and 11) and must be filed by the first installment's due date; the choice cannot be changed for that year (IRS: Form 2220 instructions).

The other method for uneven income, the adjusted seasonal installment method, measures this year against income in the three preceding tax years. A corporation without that history generally cannot qualify (26 CFR 1.6655-3).

What is the C corp estimated tax penalty if it pays none or too little?

The penalty is the IRS underpayment rate, reset each quarter (7% a year when this page was checked), applied to each installment's shortfall from its due date until the shortfall is paid or, if earlier, generally the 15th day of the fourth month after the year ends, as simple interest with no daily compounding (26 U.S.C. 6655; 26 U.S.C. 6622(b); IRS: Quarterly interest rates).

• Each installment stands alone. A later catch-up payment, or a refund on the return, does not erase the penalty for an earlier date (IRS: Publication 542).
• Payments fill the oldest hole first. A June payment is applied first to any April shortfall, so the June installment can come up short too (IRS: Form 2220 instructions).
• Small tax, no penalty. None applies if the tax shown on the return is under $500 (26 U.S.C. 6655(f)).
• A good reason does not remove it. The penalty applies even when there was reasonable cause for the shortfall, and first-time penalty relief does not cover it; the narrow exception is reliance on wrong written IRS advice (26 CFR 1.6655-1; IRS: Corporate estimated tax penalty; IRS: Administrative penalty relief). IRS disaster relief can postpone due dates (IRS: Publication 542). Paying each installment by its date is what limits it.

The IRS usually figures the penalty itself and bills the corporation. Form 2220 must go with the return when the corporation uses the annualized method; the penalty then goes on the estimated tax penalty line of Form 1120 (IRS: Form 1120 instructions). If a bill arrives, check it installment by installment against the payment records. If the IRS missed a payment, the corporation can send Form 2220, a signed letter and proof of payment to the address on the notice (IRS: Corporate estimated tax penalty). For notices in general, see an IRS notice to your business.

How does a C corp pay estimated tax?

By electronic funds transfer: EFTPS or the corporation's IRS business tax account, both free. A tax professional, bank or payroll service can also deposit for it (IRS: Form 1120 instructions).

• EFTPS enrollment can take up to five business days, so enroll well before the first due date. Payments can be scheduled up to 365 days ahead (IRS: EFTPS).
• Pay under the corporation's EIN as corporate estimated tax for the right tax year. The owners' own estimates are separate payments under their own numbers.
• To record the payments, see setting up books for a new corporation.

Overpaid estimated tax? Can the corporation get a quick refund?

Yes, if the overpayment is at least 10% of the expected tax and at least $500. The corporation files Form 4466 after its year ends and before it files its return, no later than the return's original due date; an extension does not extend it. The IRS acts on the form within 45 days (IRS: Publication 542; IRS: Form 1120 instructions). If the refund turns out too large, the excess draws a charge at the underpayment rate from the refund date until the 15th day of the fourth month after the year ends (26 U.S.C. 6655(h)).

Otherwise the overpayment comes back as a refund on the return or can be applied to next year's estimates.

Does the large-corporation rule apply to a new corporation?

Rarely in year one. A large corporation had taxable income of $1 million or more in any of its three preceding tax years, or in fewer years if it has not existed that long. It may use last year's tax only for its first installment (IRS: Publication 542). A new corporation has no preceding years, and it cannot use last year's tax anyway.

Two rules widen the test. A predecessor corporation's taxable income counts, for example when another corporation merged into it, and members of a controlled group share the $1 million amount (IRS: Form 2220 instructions; 26 CFR 1.6655-4). A first year that reaches the limit makes the corporation large for its next three years, and a short first year's taxable income is scaled up to 12 months for this test (26 CFR 1.6655-4).

What about S corporations and LLCs taxed as corporations?

An LLC that elected to be taxed as a C corporation follows this page. An existing LLC that elects corporate tax on Form 8832 is treated as moving its assets into a new corporation at the start of the election's effective date (up to 75 days before the form is filed), so its first corporate tax year and the short-year due dates count from that date (26 CFR 301.7701-3). An S corporation's owners may owe estimated tax personally on their share of the profit.

The table follows the IRS pages on estimated tax for S corporations and estimated taxes, and the Form 1120-S instructions. S corporation owners' payments are covered in S corporation estimated tax payments.

States set their own corporate estimated tax and minimum tax rules; California's minimum tax is one example.

Example

These examples are illustrative; all figures are in US dollars, and each corporation uses a December 31 year-end.

Formed January 10, steady profit

Year one: the corporation expects $40,000 of taxable income, so tax of about $8,400. It pays $2,100 on April 15, June 15, September 15 and December 15. Had it paid nothing until filing, each $2,100 would draw the penalty from its own date until April 15 of the next year: about $400 in total at an assumed 7% rate.

Year two: the first year ran January 10 to December 31, so it was not a full 12 months. The year-one tax cannot be the measure, and year-two payments must again cover year-two tax.

Formed March 1

Year one: the first year starts in March, so its fourth month is June and April 15 drops away. Expected taxable income of $60,000 gives tax of about $12,600, paid as $4,200 on June 15, September 15 and December 15.

Year two: the first year was 10 months, so year two again pays on current-year tax, in four installments.

Profit arrives in the fourth quarter

An online business formed in early January breaks even through September, then earns $150,000 of taxable income from October to December: tax of about $31,500. Under the regular method, $7,875 was due on each of the four dates. Under the annualized method, profit for the first 3, 3, 6 and 9 months is zero, so each required installment is $0. The corporation pays the $31,500 by April 15 of the next year and attaches Form 2220, backed by books that show the profit for each period.

Different for you?

• The first profitable quarter has arrived, or the first year started mid-year: confirm the due dates and amounts with corporate tax help.
• An installment date has passed unpaid or short: a catch-up payment limits the penalty on that shortfall; check the amounts, and whether the annualized method lowers them, with corporate tax help.
• An IRS estimated tax penalty bill arrived: check it installment by installment, and whether the annualized method applies, with corporate tax help.
• Profit came late but the books are not kept monthly: the annualized method needs period-by-period profit; see bookkeeping.
• You are unsure when the first tax year started or which year-end to choose: see the first tax year of a new company.
• You are preparing the first Form 1120: see your first business tax return.
• The corporation has a foreign owner and no revenue yet: see the first corporate return with no revenue.
• The S election was filed late or is not yet in effect: for any year it is not in effect, the corporation is a C corporation and follows this page; see late S corporation election relief.
• You own an S corporation: see S corporation estimated tax payments.
• You need to pay your own quarterly estimates: see quarterly estimated tax payments.
• You are still choosing C or S status: see C corporation or S corporation.