If you are a W2 employee, you are essentially paying taxes every time you get a payroll check. But, if you aren’t on a regular payroll, or have earnings from a business or investments, then you aren’t going to send those payments in as regularly. The Federal & State agencies want your money, so they created a ‘requirement’ to pay Estimated Taxes during the year. This way, they still receive these periodically from you.
Remember, your total tax bill is based on everyone in your household whom you file a tax return with – so it’s possible that your spouse’s withholding from their W2 might cover your business’ tax bill.
The tax agencies will say these are “required” payments, but they aren’t really. If you don’t pay them during the year on the due dates (see below), when you file your tax returns there may be an Underpayment Penalty you have to pay based on your actual tax situation each year, but it’s actually a really low percentage, like 3-5% of the tax due. (The actual calculation is complicated and has a bunch of factors, but in general, it’s in that range.)
Many of our clients are happy to keep their cash in their own bank accounts instead of sending it to a tax agency, in case they need it. (And, let me tell you, in March 2020 we had a bunch of clients who were really happy they had made that choice!)
You still MUST be saving for your tax bill and moving that money to a separate bank account (and not touching it during the year). But you can just do that, have the funds ready, and pay your tax bill plus a possible small penalty when your returns are filed.
This (like many of the strategies we recommend) is a “know thyself” situation. If you are going to dip into that tax savings account during the year and spend those funds on other things, perhaps it is better to just send it in and not worry about it – but as with anything else in your business – make the empowered choice that’s the best strategic cash option for you and your business!
Traditional accountants take what taxes were last year, divide it by 4 and tell you to send that in every quarter. And, doing that will cover you (most of the time) from having any penalties for not paying in – it also doesn’t necessarily mean you are paying the right amounts.
We don’t work with many folks who have the same business as they did last year, so this method really falls short, in my opinion. Your profits could be much higher (or lower) any year based on the prior year based on what’s actually going on in your business. By sending in their (lazy) payment recommendations, you could end up overpaying – and sending that money to the government instead of being able to use it in our business. Or you could underpay, and then think you have taken care of your tax bill but end up with a large bill come tax day. Both of these scenarios suck – AND are preventable.
Again, remember that your tax situation isn’t just you and your business, it’s also impacted by your spouse’s paycheck/income and their withholding as well. You need to take your entire tax situation into account so if you are married, have children, own a home, etc. this is all taken into account when estimating the payments. Your accountant should be able to give you a percentage and help you calculate your payments, and they should be doing this with you multiple times during the year. If they aren’t – you deserve better support. Book a call with our team to learn more.
|FOR THE PERIOD OF||PAYMENT DUE DATE|
|January 1 – March 31||April 15|
|April 1 – May 31||June 15|
|June 1 – August 31||September 15|
|September 1 – December 31||January 15 (of the next year)|
We recommend paying through the IRS website’s payment portal rather than sending in a check, this way you get confirmation and a record it was sent timely.
Remember, you have to pay state taxes as well and most states offer a way to pay online as well, you’ll want to google search “estimated tax payments for (your state)”.
No – but you also want to make sure you have tax support that is actually supportive of your business.
If you’re already getting tax support from Empowered Profit, great news – we take care of all of this for you and it is a part of the comprehensive tax support we offer. We have check-ins with our clients during the year where we review each client’s profit and payroll and tweak their tax projections to either make these estimated payments or save the dollar amount they’d like to put away.
If you aren’t working with us and want to learn more about this…
This is provided as information only and as a starting point for a conversation with your own legal and accounting team, this should not be considered legal or financial advice.
All of these decisions are based on a number of factors and we cannot guarantee that you will experience any specific results based on any information provided. Please speak with your own retained professionals to ensure that you are making the best decisions for your business & personal situation.
Please speak with your own retained professionals to ensure that you are making the best decisions for your business & personal situation.