Estimated Tax Payments

I am Jenn Shaw and I am happy that you are here. Today we are going to be talking about estimated tax payments. This is a great time to talk about estimated taxes because we are approaching 415. What is 415? The tax deadline in the United States. And it is just this ever flowing number that do you owe taxes? Do you not owe taxes? What how can we help so that we almost have a zero balance when tax payment is due on 415? Because if we did a good job doing estimated taxes, then you owe nothing come April 15th. All right, let's get into some slides.

Okay, so what and who is estimated taxes for? If you are a W2 employee, the employer is the one that is pulling your taxes. you fill out a W4 and it says, "Okay, I have, you know, two dependents and this extra side business." And so when you run my payroll, I want you to take this amount of money out of my paycheck. And it's a formula that's in there. Unfortunately, as self-employed or business owners, we are the people that are calculating that. So if you have an S corporation or a C corporation and you're running your payroll, that is one piece that you are paying taxes on, but you also have the other piece of your net income at the end of the year, what your actual business has created. And this is for sole proprietors, LLC's or S corporations.

So estimated taxes are basically ensuring that throughout the year you are paying the amounts of money that you owe to the IRS on a regular basis. So, the IRS wants you to do it at least on a quarterly basis cuz they do want their money. And we are able to then at the end of the year or at 4:15 hopefully get very close to what we should have owed and can just go on with our lives. Okay. So, when are these taxes due? So, the first estimated tax is actually going to be on April 15th. It's kind of a really sucky time because if you didn't do your estimated taxes for the previous year, you owe not only for quarter 1, but you also owe for last year. So that's why getting in the rhythm of estimated payments is really going to help you. So the it's not a traditional quarter. Um for quarter 1 for the IRS, it's the dates between January 1st and March 31st. Quarter 2 is going to be due June 15th, but it's going to capture April 1st to May 31st income. You have September 15th, which is quarter 3. This will be June 1st to August 31st. And then quarter 4 will wrap up that payment is due January 15th, but it will encompass September 1st to December 31st.

And of course, if one of these dates falls on a weekend or a holiday, it always shifts to the next business day. You don't have to worry about prepaying it. They do shift it to the next business day. What does that mean? Um there's all these dates, there's all these amounts. So, let's look at that. Um it's it's hard to see. Yeah. So, payments are they're not evenly distributed because your income can fluctuate. So they do want you to look at the year-to-date for that timeline and and kind of look at it. Your deadlines are uneven, income fluctuates and yeah. So best approach is to make sure that you are doing your accounting regularly. So before these due dates are coming that you know what you may or may not owe and you can make a good calculated guess. This is really helpful when you have someone on your team that is doing your taxes. So, this would be a tax strategy to help get your estimated taxes exactly where you are because you don't want to be paying too much to the IRS because then basically you're giving them an interest free loan. Although people get really excited to get tax refunds, that actually isn't the point because you want to keep as much cash as you possibly can throughout the year. You also don't want to pay too little because then the IRS is saying, "Hey, you did give us the money when you were supposed to and we really need to see that." So, they are going to throw on penalties and interest for late payments. So, we just always want to stay compliant and make sure that our cash flow is good.

A best practice is really to do a calculation at the quarter. So although we have these quarters of for example quarter 1 which is January 1 to March 31st paid in April we'll go ahead and look at what our income is see what our estimated tax may be and we'll go ahead and pay that. And then when quarter 2 rolls around so that is going to be at the end of May we'll actually want to look at our total income from January to May. look at what our tax would be, take out what we've already prepaid, and then true up what that payment could be. So, for example, quarter 1, we had a profit of $50,000. So, let's say that we have a 20% tax rate, so we owe $10,000 as a tax payment. So, we go ahead and make that. Quarter two, let's say we have a loss for that time as 20,000. And so our year-to-ate profit is actually going to be 30,000. So, we should have owed 6,000 in totality, but we've already paid 10,000. Well, we don't need to pay again because we've already kind of made a prepayment to it. And that will just help us in quarter 3 and quarter 4 to see where we're at. But you can see where ensuring that you're doing a year-to-date calculation and making encompassing all of your income is important because every industry is not the same same same. We do not have W2 jobs. We have maybe a really heavy season in the summertime and so we know that quarter 3 is going to be a really heavy time for estimated taxes. Perhaps to help our cash flow and we know that that happens. Maybe we have a lower quarter 1, but maybe we just want to beef up our or sorry, lower our quarter 3 payment so we kind of even everything out so that we don't have, you know, 2,000 in quarter 1 and then 15,000 in quarter 3. So just kind of analyzing it throughout the year and seeing what those payments are.

Okay, you're like, "Jenn, this is crazy sauce and I don't want to have to deal with this." So, what you can do is pay exactly what you paid last year. So, if your adjusted gross income was under $150,000 for the year, then what you do is you pay 100% of what you owed last year. So, every quarter you can chunk those off. So, for example, you have the $20,000 due last year. In 26 to avoid any penalties or interest, you will pay again $20,000. And you would then split those payments into four equal payments. So, 5,000 5,000 quarter 1, 5,000 quarter 2, 5,000 quarter 3, 5,000 quarter 4. If you make more than 150,000 for your adjusted gross income, then you do need to beef that up a little bit and pay 110% of what your potential tax is going to be. So, if again we're in that 20,000 was our tax bill last year, we do need to bump that up to 22,000 and split that into four equal payments. That's called the safe harbor rule and can help avoid all of the confusion and ideas of all of the formulas of what you actually owe.

All right, that brings us to the end of our topic of estimated taxes. It can always be a cumbersome I know people hate talking about taxes, but it is important to know and understand that you are liable throughout the year. But if you're still like, "Ah, I have no idea what to do." You can always reach out to us. We are happy to help with those things and look at what you have going on, create and make sure that you are compliant in your business and in your personal finances. And yeah, so you can reach out to us on our email, our phone number or our website. I hope you have a wonderful weekend and excited to talk about the next thing next week. Enjoy your weekend.