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  • Writer's pictureNicholas English

Premium Tax Estimate Calculations Explained

Updated: May 26, 2023

Insurance premium taxes are generally divided into one or more comprehensive annual returns and one or more other periodic returns. A more comprehensive annual return is normally used to calculate premium taxes due for a particular tax year. In this article, “Annual Return” will refer to one or more forms that are due on an annual basis that calculate the premium tax due in a particular tax year.


For the purposes of this article, periodic returns other than Annual Returns will be referred to as “Estimate Returns” and “Monthly Returns”. “Estimate Returns” will refer to forms designed to prepay the estimated or actual premium taxes that will be due on the next annual return. Estimate Returns may be known as “quarterly payments”, “pre-payments”, “tax installments”, and various other names depending on the jurisdiction. “Monthly Returns” will refer to returns due for every month and designed to pay the actual tax due for a particular month, with no corresponding Annual Return. Puerto Rico is the only jurisdiction with an Annual Return and no Estimate Returns or Monthly Returns. The U.S. territories of the Virgin Islands, Guam, and Northern Mariana Islands have Monthly Returns and no Annual Return. New Hampshire does not have a separate Estimate Return, but a “prepayment” calculated as 100% of prior-year taxes is due on the Annual Return. The other jurisdictions require an Annual Return with one or more Estimate Returns unless an exception is met.


Filing Thresholds

Taxpayers may save themselves time and effort by confirming if a filing threshold exists for an Estimate Return. Some jurisdictions always require Estimate Returns to be filed, even if no tax is due and no premiums were written. Other jurisdictions only require Estimate Returns to be filed if the prior-year (or current-year estimated) tax is above a certain threshold. The highest threshold is for Arizona, which does not require the filing of Estimate Returns unless prior-year tax liability is $50,000 or more.[1]


Calculation of Estimate Returns

Calculation of Estimate Returns can be divided into two methods: prior-year and current-year. Prior-year calculation relies on information from the prior-year Annual Return. Current-year calculation will require more information than what is available on the prior-year Annual Return. Some jurisdictions allow the option of using current-year or prior-year calculations; others require only current-year or only prior-year calculation. When given the choice, prior-year calculation may be preferred since it eliminates the risk of underpayment. However, the current-year method may be preferred if a company anticipates a significant drop in premiums in the current tax year.


Taxpayers are required to use current-year calculation for Estimate Returns for the following jurisdictions:

  • Hawaii.[2] Penalties and interest may apply for any underpayment of tax.[3]

  • Maine, but only for the Estimate Returns for the “Fire Investigation & Prevention Tax”.[4] Penalties may apply if underpaid.[5]

  • Massachusetts.[6] Interest applies if underpaid by more than 10%, unless an exception applies.[7]

  • Michigan.[8] Penalties and interest apply if underpaid by more than 15%, unless an exception applies.[9]

  • Mississippi.[10] Penalties and interest apply if underpaid by more than 10%.[11]

  • Nevada.[12] Penalties and interest apply for any underpayment of tax.[13]

  • New Mexico.[14] Penalties may apply for any underpayment of tax.[15]


Special attention should be paid to Estimate Returns that require current-year calculations, since those require additional information not found on the prior-year Annual Return and may require estimation if current-year information is not readily available. Use caution when reviewing the exact requirements for states that require current-year calculation. Nevada requires Estimate Return tax to be based on actual “net direct premiums and net direct considerations written during the preceding calendar quarter”.[16] Mississippi requires taxpayers to “estimate the amount of insurance premium taxes to be due for each calendar year and pay insurance premium taxes based on a percentage of that estimate…”.[17] The first Estimate Returns for Nevada and Mississippi cover the period of January 1 to March 31. Even if the premiums written in a single tax year in each of those states is exactly $1,000,000, the calculations for each of those returns will yield different results if premiums written in the first quarter do not equal 25% of annual premiums.


The rest of the Estimate Returns may be calculated and paid using only prior-year calculation without the risk of receiving an underpayment penalty. The are two subtypes of prior-year calculation for Estimate Returns:

  • Estimate Returns that may use current-year calculation, but you can avoid an underpayment penalty by using prior-year calculation. Examples include Arkansas[18], Connecticut[19], Delaware[20], and New York.[21]

  • Estimate Returns that require prior-year calculation. Examples include California[22], Iowa[23], Oklahoma[24], and Wyoming[25].

Taxpayers should be able to complete most Estimates Returns after their respective Annual Returns are filed. In some jurisdictions, the first Estimate Return is due before or on the same date as the Annual Return. Taxpayers can save time and reduce underpayment risk by using the prior-year calculation method where possible.


Disclaimer

The information provided in this article is for general educational purposes only and is not a substitute for legal or tax advice.


 

[1] Ariz. Rev. Stat. § 20-224(F). Arizona workers’ compensation insurance is taxed separately and has an Estimate Return filing threshold of $2,000. Ariz. Rev. Stat. § 23-961(I).

[6] Mass. Gen. Laws ch. 63B:3(c). Prior-year calculation is allowed for entities that are not “large corporations” as defined in 26 U.S.C. § 6655(g)(2).

[8] Mich. Comp. Laws § 206.681. Prior-year calculation is allowed if the preceding year’s tax liability was $20,000 or less and if the entity submitted four equal installments the sum of which equals the immediately preceding tax year’s liability. Mich. Comp. Laws § 206.681(3)(b).

[14] Current-year calculation required to determine the greater of current-year or prior-year calculation. N.M. Stat. § 7-40-7.

[18] Ark. Code § 26-57-604(b)(2). No penalty if using prior-year calculation per Ark. Code § 26-18-208(6).

[20] Del. Code tit. 18, § 702(d). No penalty if using prior-year calculation per Del. Code tit. 18, § 702(f).

[21] N.Y. Tax Law § 1513. No penalty if using prior-year calculation per N.Y. Tax Law § 1085(d). See N.Y. Tax Law § 1519.

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