If you are an entrepreneur or a small business owner like me, you will want to make sure you have paid the correct yearly tax to the IRS and/or your state government. You may also have to pay estimates is if you have a special tax circumstance or make a lot of money in a particular year. Paying your taxes on time will help you avoid interest and penalties and give the government less of a chance to want to review your returns. Here are 5 things you should know about paying estimated taxes:
1. Many of you will have to pay estimated taxes
If you owe at least $1000 on your tax return, and expect your withholding to be less than the previous year, you will need to pay estimated taxes. Types of income on which you may pay estimated taxes include income from being self-employed, alimony, gains from the sale of assets, or income from receiving a cash prize or award.
2. Pay your estimated taxes on time
The first estimated tax payment is due by the tax return filing date (generally it is April 15th). After that, estimated tax payment due dates are June 15th, September 15th and January 15th of the following year. If you do not pay estimated taxes in a timely manner, you may end up owing more to Uncle Sam.
3. Have your tax professional figure your estimated taxes
In addition to preparing your tax return, your tax professional can figure out your estimated taxes by using your prior year’s income, deductions, and credits in their tax planning software. Sometimes this is as simple as dividing your total tax by 4 and paying it 4 times a year. But often times it is not as easy if you have extenuating circumstances in a given year.
4. Have your professional revise your estimated tax projection as needed
Often times self employed individuals have swings in income throughout the year due to a changing business climate. Or maybe you are in a seasonal business such as the landscape business where you make more of your money in one quarter vs. another quarter. For this reason you will owe differing amounts each quarter to the government. If you think there will be a substantial change in the taxes you owe during the year, have your tax professional run a new tax projection as soon as possible.
5. Pay what you owe, not a dime more or less
Your estimated taxes paid should come be very close to your total tax owed, resulting in a small refund or amount owed. Be careful to avoid paying too little or too much: Too little means you will owe a big chunk of tax come tax time. Pay too much during the year is like a forced savings account, as the government will simply send you your money back the following year. This, of course, is not great planning either way!
Listen below to Win Damon and Stu as they discuss this very topic on WNBP Radio 1450 and wnbp.com
With more than 23 years of experience as a credentialed tax professional, Stu Steinberg, CPA, MBA brings a broad depth of knowledge to his work. He has worked with small business entrepreneurs for many years helping them plan their businesses more effectively. He can be reached at stu@erocktax.com or (781) 247-5569 anytime.