Estimated taxes

Managing the Challenges of Estimated Taxes as an Entrepreneur

The hardest part of self-employment may well be dealing with estimated taxes. Nothing about the system is straightforward, starting with the fact that payments are not due quarterly. They are due on the 15th of April, June, September and January, which are three, two, three, and four months apart, respectively.

It keeps things interesting!

How much do I owe in estimated taxes?

To pay estimated taxes, people who are self-employed are to pay one quarter of what they think they will owe for the year. Payments can be sent electronically through the IRS, and the detailed instructions can be found on the IRS website.

The practical information is this: You will owe money, and you have no idea how much money you will make until the year is closed and all expenses paid. If you underpay, you will have to pay a penalty to the IRS.

The penalty calculation is tricky but is essentially 4 percent of the amount underpaid, adjusted for the amount of time that the underpayment is outstanding.



The bigger issue is that if you owe money, you may have to come up with a lot of cash by April 15, even if you don’t owe a penalty. It can be a shock to have a great year and then get killed by a large tax payment.

The reason that happens is that there’s a difference between the IRS estimated tax calculation for avoiding a penalty and the actual calculation of your taxes. No matter how much money you make this year, the IRS says that you will not have to pay a penalty if you owe less than $1,000 in tax, if you made payments equal to at least 90 percent of what you owe for the current year, or if your estimated tax payments are 100 percent of the amount you owed last year, whichever is smaller. Paying what you owed last year seems sensible, unless this year end up being significantly better.

How do I keep track of my estimated taxes?

If you keep good records (and you should!), you can figure out approximately what you need to pay for each due date by looking at how much income you have after expenses. Multiply it by the rate you paid last year, subtract any payments you already made, and then send in the remaining amount to the IRS. In most cases, this will get you to payments of at least 90 percent of what you owe to avoid April 15 surprises.


Sign Up: Receive the StartupNation newsletter!

A simpler method is to take out 30 percent of each payment you receive, put it in a bank account for taxes, and send the value of the account to the IRS each quarter.

If you find that you have overpaid at year end, put the difference into a retirement account. This method usually results in overpayment and may pinch your cash flow, but it prevents surprises.

One final point: if your state has an income tax, you may have to pay estimated taxes there, too – and the payment schedule may be different. Same if your city has an income tax.

Taxes are the price we pay for living where we do. They are inevitable, but they don’t have to be impossible. If you haven’t been making estimated payments, mark the next due date on your calendar and make an effort to catch up. It will save you a lot of grief.

Total
10
Shares
Previous Article
audience

Roles, Goals and Worries: A Simple Framework for Understanding Your Audience

Next Article
publicity

The Best Ways to Get Affordable Publicity for Your Side Hustle

Related Posts
metaverse
Read More

A Beginner’s Guide to Business Success in the Metaverse 

There’s no hiding from it: The metaverse is coming, and it’s on track to disrupt the world of business as we know it. Championed by newly rebranded Meta (formerly Facebook), the metaverse will be a network of 3D, 360-degree immersive and interactive micro-worlds. These digital spaces are where we will buy products, consume media,  learn...
blockchain technology
Read More

11 Benefits of Blockchain Technology for Small Businesses

What is one benefit of utilizing blockchain technology in your small business? To help you understand the benefits of blockchain technology, we asked fintech experts and small business owners this question for their best insights. From the benefit of border-free transactionality to top-level data security, there are several benefits of utilizing blockchain technology in your...
outsourcing
Read More

4 Reasons to Consider Outsourcing Your Sales Support

Sales representatives are responsible for boosting the company’s profits, and it can be a daunting task. Because of this, sales support takes some of this burden off their backs. Having sales support may not directly improve sales, but it has a positive impact on operations. Additionally, representatives can concentrate on improving their performance. The roles...
wjr business beat
Read More

WJR Business Beat: Customer Service is King (Episode 350)

On today's Business Beat, Jeff discusses survey results on how underwhelmed people are by customer service these days despite it being the greatest opportunity for small businesses to rise to the top. Tune in to the Business Beat, below, to learn more about the survey:   Tune in to News/Talk 760 AM WJR weekday mornings...