How to Pay Your Estimated Tax

Short on funds….and not paying your estimated taxes, that will put a damper on your cash flow to be sure.  I know you’re already stressed and here I am telling you it’s time to pay the piper (or in this case the IRS).

Budgeting for your business and forecasting is such an important topic that I’m going to save most of that for another article I’m doing on how to improve your profit.  Stay tuned.

I don’t want to pay the government more than what I owe them.  As a small business owner, I would rather take the money and put it in something that will generate profits like marketing or another employee almost anything then paying penalties.

With that in mind, I’m a firm believer that every time you make a sale you should be putting a portion of the revenue into a business savings account, so you have the money there to pay your estimated taxes.  Our Profit Roadmap is the perfect way to estimate your taxes so you know the money is there when you need to pay.

First, let’s talk about what the IRS has to say about those darn taxes and how to determine what you need to pay the taxman.

The IRS Definition of Estimated Taxes

Estimated tax is the method used to pay tax on income that is not subject to withholding. This income includes earnings from self-employment, interest, dividends, rents, and alimony. Taxpayers who do not choose to have taxes withheld from other taxable income should also make estimated tax payments.

I really wish the IRS would pay some people to write in plain language but the gist of this is.  If you own a business and are a:

• Individual/1099 Contractor
• Sole Proprietor
• Partnership
• S Corporation

And….

You expect to owe tax of $1000.00 or more then you must pay an estimated tax divided up in quarterly throughout the year.

Unless Your a Brand New Business You Should Not Wait to File Your Estimated Taxes

Now Just to be clear if you have not paid estimated taxes and you owe money at the end of the year when you file your tax returns you may have to pay a PENALTY FOR UNDERPAYMENT.  Man, that would suck so let’s not do that. 

What These Taxes Include for Your Business

Estimated tax includes the taxes you must pay and can pay both the income tax and the self-employment tax including your Social Security and Medicare.  It does not include the payroll taxes that you would have to pay an employee.  That is done as part of withholding.  If you need information on withholding payroll taxes for your employees you can go here.

How Do You Figure Out What You Owe?

If you’ve downloaded the Profit Tracker we’ve done the work for you in budgeting so you’ll always have money set aside to pay your taxes.  Does that mean that is what you owe?  Probably not.  In fact, you may have more set aside then you need.

When your estimated tax rolls around you want more of an accurate as possible, I never like to overpay the government if I can get away with it.  So, what should your estimated taxes include? 

• Income
• Deductions
• Credits

Now if you don’t know this off the top of your head you can use the safe harbor rule.

What is the Safe Harbor rule?

The IRS knows that people who aren’t working a traditional W-2 job might have irregular income.  So, they offer a little bit of leeway and won’t punish you if you’re a bit short when paying taxes

There are three parts to the safe harbor rule:

• If you expect to owe less than $1000.00 after subtracting your withholding, you’re safe.
• If you pay $100% of your tax liability for the previous year through estimated quarterly payments, you’re safe. Now, if your adjusted gross income for the year was over $150,000 then you have to pay 110%
• If you pay at least 90% of your actual taxes for the current year you’re safe.

Let’s use an example just to see how it works.

Let’s say Cool Web Design has a tax liability from 2018 of $12,000.  Now it’s over $1,000.00 so he is going to have to pay estimated tax.

Now last year Cool Web Design made $110,000. Which means, their quarterly taxes are going to be $12,000/4= $3,000 per quarter.

Good News! Cool Web Design is growing, and they are going to easily clear $200,000 in adjusted gross income.  Now, they are going to recalculate their estimated tax to be 110% so they don’t get hit with an underpayment penalty or a large bill at the end of the year when they file their return. 12000*10%= 13200 then 13200/4=3300 each quarter.

When are your Estimated Taxes Due for 2020

Tax payments are due on a quarterly basis.  And those dtes are roughly the same each year.  Usually the 15^th of April, June, September and the following January.  Sometimes they slide due to holidays or weekends.

Frequently Asked Questions 

What happens if you miss a quarterly estimated tax payment?

Of course, the government is more than happy to take your money as quickly and fully as possible (you know they want to spend it as quickly as they tax you on it). 

 I’m not a big proponent of paying them all at once because this can mess with your cash flow.  You also, do not want to wait until your tax return is due. 

That will only work if this is your first year in business and you have no way of knowing what your adjusted gross income will be.

How to Calculated your Estimated Taxes.

Putting it All Together

If this isn’t your first year in business you are most likely going to have to pay your estimated tax.  Try to pay at least 100% of your taxes each quarter from your prior years tax liability.  If you know your growing you may want to figure out how much extra to put in so you don’t come up to short at the end of the year and have a giant tax bill.

As Always if you have questions or need a consultation you can always talk to us.

Cheers!

Andrea