On Estimated Taxes

When you work a typical job as an employee, you don’t usually have to think about taxes. It’s taken out each paycheck. You may not even notice the money coming out. At the end of the year, you file your taxes and get a little refund or owe a little more. It’s easy and not something you worry too much about.

If you work for yourself, it’s a whole other story. Most likely, you aren’t on payroll. You pay yourself by transferring money from the business account to your personal account. While this is an appropriate way to pay yourself, you must also pay quarterly estimated taxes. You pay yourself directly and are not paying any taxes to the federal and state governments.

At this point, most small business owners get very confused and panicky. Paying the government used to done for them. Now they don’t know how to comply. It starts to feel like a lot of money when you make four big payments, as opposed to little payments each paycheck!

Paying the government is not fun, but, I argue it is a good thing. You don’t owe taxes if your business is not making a profit. In time the business will run of money and fail, which is not good.  If your business is making a profit, then you owe taxes. The more profit you make, the more taxes you owe. That profit is yours. Only a part of it goes to the government. Most business owners pay between 20-35% to the government. That means they keep the remaining 80-65%.

In the first year of business, it’s hard to say what your net profit will be. If you're married or have kids, the calculation gets even more complicated. If you are making a lot of profit, then I recommend speaking to a professional soon. If you have a working spouse or have a lot of deductions, you may not need make estimated payments. Again, consult a professional to discuss your specific tax situation. With the complexity of the tax code, it really is different for everyone!

In all honesty, you are doing yourself a favor by making the estimated tax payments. If the quarterly tax payments look big, imagine how huge the annual tax bill will be! You will incur interest and penalties, which is like adding salt to the wounds. If you file your annual taxes and must make the entire year’s payment, it is due by April 15th. Another option is to set up a payment plan and pay if off over no more than 72 months, or 6 years. You will be responsible for the current year's estimated payments as well.

All said, it’s easier to make four semi-big tax payments compared to one huge tax payment. Paying taxes means you are making a profit, so it is a rite of passage. It’s part of being a profitable business owner. You owe taxes because you are making money!

If you need help figuring out how much to pay for your quarterly taxes, send me a message. Every person’s situation is different and I’m happy to help you navigate the wild world of taxes.