Be Prepared

Your business is profitable! Congratulations! You owe taxes! Contrary to popular belief, owing taxes is not a bad thing. It means your business made money. Yes, it’s great to minimize your tax bill as much as legally possible, but at the end of the day, the only way you can avoid paying taxes forever is for your business to not make money (or to cheat, which we highly discourage).

 

Owing taxes is not a bad thing, being unprepared for the payment is. It’s important to do proper tax planning throughout the year as well as set aside money to pay your taxes as you go.

 

Estimated Tax Payments

Estimated tax payments are not always required to be paid. Typically, you will have estimated tax payments due if you had a tax bill the prior year that was not fully covered by payroll withholdings, or if you are going to have a significantly larger tax bill in the current year. If quarterly estimates are required, there is a safe harbor calculation that gives you the minimum amount due based on your prior year tax bill. This is divided evenly throughout the year and due quarterly.

 

If your business is seasonal and makes it’s income inconsistently throughout the year, you can adjust your quarterly estimates to be paid throughout the year based on when you earned the income. For example, if your total estimates needed to be paid in for the year is $40,000, but you get 50% of your income in the 4^th quarter, you can split $20,000 over the first three quarters and pay $20,000 in the 4^th quarter. You’ll just need to be prepared to prove this allocation to the IRS when filing your taxes.

 

Setting Taxes Aside

Whether you have to pay quarterly taxes or not, it’s a good idea to set aside your taxes as you generate the income. This will help you avoid having to come up with a significant amount of cash at the end of the year. We suggest a couple of different options for setting aside tax money.

• Calculate estimated taxes due based on monthly net income. Each month, after you’ve closed your books, calculate your estimated taxes due by multiplying your net income by your prior year tax rate. Regardless of whether or not you take any distributions from the business, set this money aside to prepare for the tax bill due.
• Set aside taxes with each distribution you take based on your tax rate. Even if you aren’t taking out a distribution for the full amount of net income each month, you’ll have set aside at least enough taxes to cover the amount you’ve taken out of the business. Any remaining net income should have cash within the business to cover that portion of the taxes.

Regardless of which option you choose to calculate your set aside, we recommend opening a separate tax savings account (either in the business or personally). As you calculate the set aside each month, move the money to your tax savings account. This money should be sacred. Try not to touch this money for anything, so that it’s available when needed to pay the tax bill.

 

Paying Your Taxes

If you owe quarterly estimates based on your prior year tax return, this is the minimum amount you have to pay each quarter. You may set aside more money each month than needed to cover the quarterly estimates. This does not mean that money is available. It just means you’re making more money than the prior year and you will have that available to you at the end of the year when your final tax bill is calculated less the estimates you’ve paid.  

 

Be sure to pay your taxes on time to avoid late payment penalties. If you’ve paid your quarterly estimates throughout the year, the balance will be due with your tax return in April (for personal returns, or March for Corporate returns). Even if you file an extension, you need to pay an estimate of your tax by April 15^th (or March 15^th) to avoid penalties.

 

Quarterly Estimate Due Dates

Personal:

• • • • • • • • • • • • • April 15^th
                        • June 15^th
                        • September 15^th
                        • January 15^th

 

Corporate:

• • • • • • • • • • • • • March 15^th
                        • June 15^th
                        • September 15^th
                        • December 15^th

 

Paying taxes still sucks. But, if you’re prepared, it can suck a little less!

 

By: Shauna Huntington