What to Know About Estimated Taxes
Time and time again I speak with business owners of all sizes who do not pay their estimated tax payments. For those in their first year of business, this sets a bad foundation that can be extremely difficult to get out.
Though I can only guide and offer my advice, it is up to my clients to take this action themselves, but I hope this blog post will incentivize everyone a bit 😀
What are estimated tax payments?
These are your tax payments made during the year (4 times) on the estimated amount of income you expect to make during the year. It is required for the IRS though each state has different amounts of income you plan to make before you are required to pay estimated payments.
Example: If you live in New York, you will need to pay estimated taxes to the IRS if you (generally) will owe more than $1,000 as a sole prop/partnership/s-corp and will need to pay estimated taxes to New York State if I expect to owe more than $300 in taxes of New York State, $300 of New York City, and $300 of Yonkers income tax OR if I expect my tax withheld to be at least 90% of the tax shown (this would be the case if I had a W-2 job & was self-employed). That said, very important to research the rules for your state!
Why do I need to pay during the year?
Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. So as a sole-proprietor/s-corp/, this might feel annoying to deal with, but it’s important to know that this rule applies to everyone. If you are getting a paycheck, your withholding is being sent to the IRS/state governments quarterly for you already so you don’t need to do anything. As a self-employed person, it is your responsibly to make these payments.
What happens if I don’t pay estimated taxes?
Tax Penalties. Yuck! The IRS can impose penalties on quarterly tax payments for not paying on time or not paying enough tax for the year. A way to avoid this is:
paying at least 90% of this year’s tax bill
paying the same amount of taxes you owed the prior year, whichever is smaller.
The “safe harbor” rule is the latter, paying 100% of the taxes you owed the previous year. This is a great way of avoiding penalties if your business grew and you forget to re-calculate how much you owe. Do remember that you will still need to pay the additional taxes owed, but at least you won’t owe extra $ for not paying them earlier. It’s also important to note that if your net-income is more than $150k a year you need to pay 110% of what you paid in taxes the previous year.
How am I supposed to know where things stand!?
This is where having an efficient bookkeeping system in place pays off…literally! If you’re doing your own bookkeeping, or if you are hiring a professional to take care of them for you (highly recommend if you are able), you will have the numbers you need to calculate what you owe.
Calculating estimated tax payments:
The IRS has Form 1040-ES (for individual filers) and Form 1120-W (for corporations) to help you with your calculations. There are also numerous estimated tax calculators on the internet.
When are the payments due?
For 2022, the tax deadlines are:
January 1 – March 31st : Due April 18, 2022
April 1 – May 31: Due June 15, 2022
June 1 – August 31: Due September 15, 2022
September 1 – December 31: Due January 17, 2023
** PUT THESE IN YOUR CALENDAR!**
How to ensure you have enough money to pay your estimated taxes:
Ensuring you have enough money for your estimated taxes is one of the biggest struggles self-employed individuals face. A wonderful way to ensure this isn’t possible is by opening up a separate savings account (I put it into a HYS account NOT linked to my business checking & business credit card because I don’t want to see it..out of sight, out of mind).
Each month I have an automatic transfer from my business checking to my savings account. When it comes time to paying the estimated taxes I transfer the funds out of my savings to pay them. I never worry I can’t because I don’t use the money that is specifically allocated to my taxes.
How to pay estimated taxes:
There are a few ways you can pay federal income tax.
Via Electronic Federal Tax Payment System *corporations must deposit payment via this
For your state estimated taxes, please research your state requirements.
Can’t pay? Apply for a payment plan
Don’t lose hope!
Starting/running/owning a business is a lot, and things like this can feel extremely overwhelming. First, don’t worry. You are NOT alone. Secondly, there are a lot of people out there who can and want to help you. Need help organizing your books and or knowing where your business stands day to day? Contact me or another experienced bookkeeper.
Wishing you all the success!
Lotte
