Tag Archives: estimated tax payments

Tax Preparation

Paying Estimated Tax When Your Income Is Low

Many small businesses ponder the question of whether they should, or are supposed to, pay estimated tax quarterly when their income is low. It’s an interesting question, so let’s take a look at it.

When you look at the tax code, there’s a line that states: “Those who have income from their own business will need to make estimated tax payments if their tax liability is expected to be more than $1,000 for the year.”

This highlighted part begins the whole show, along with this one: “If you owed taxes at the end of last year, it probably means that too little was withheld from your paychecks, or you had other income that increased your tax liability”.

Let’s take the first one. The reason tax liability is highlighted is because it indicates what you might have to pay, not how much you’ve earned. This is an interesting distinction because, although you have to file taxes if you make more than $400 in a calendar year, the odds are that if you didn’t make a lot of money for the year that your tax liability won’t come close to owing $1,000.

Many small businesses have seasons where they might make a lot more money as opposed to making it all year round. If that’s the case, then making estimated payments when that time period comes up can make a lot of sense. However, paying every single quarter might not be feasible for you if you have to stretch your money out, so it can be a tough decision.

The best thing in this case is to at least pay something, even if it’s only $50, because you not only have to deal with the federal government but in some states they’re going to want a piece of you as well.

A caveat to this is if your spouse is earning a full time income and has taxes being taken out by their employer. In this case, if you’re filing jointly, you can probably get away with not paying anything because the bulk of the tax liability will be coming from them. It doesn’t hurt to hedge your bet though; you could end up getting your entire payment back.

Now let’s look at the second one. This one is a bit different because when you owe money and they don’t see estimated payments, and you don’t have a spouses income to offset your own, the IRS starts expecting you to pay quarterly, especially if you go on a payment plan.

If you can pay your balance within 3 months or so they’ll usually leave you alone; the IRS isn’t as scary as they’ve been made out to be. If you can’t, then you might have to deal with them at some time. Just remember that you can make small quarterly payments; at long as they get something they’ll leave you alone.

Our advice would be to try to make some kind of quarterly tax payments just to be safe. Obviously if you make a lot of money it’s the smart thing to do. If you don’t, and you can’t, don’t immediately worry about it because you’ll always have both time and payment options to catch up when you can.
 

Tax Preparation

The Thing About Estimated Tax Payments Is…

Anyone who has their own business or works independently knows that there’s this thing known as estimated tax payments. They know that they have to make these payments by certain dates 4 times a year.

What no one really knows is why.

If you take a good look at the IRS page on estimated tax payments, you’ll see that they tell you to make these payments by the assigned dates (without telling you what those dates are on that page), and that, if you either don’t make payments by those dates, or don’t pay enough on those dates, that you could incur a penalty.

Does that sound ominous or scary? I wouldn’t ever go that far but it does sound like government lawyer speak, which in essence is nonsense.

In essence, there are a couple of reasons why the federal government wants you to make estimated tax payments.

The first is because if you were working for a large corporation someone else would be taking money out from you and making those payments. So, because you’re self employed and there’s no one else doing it for you, they want you to do it; kind of a self reporting.

The second is more selfish. They want your money so they can earn interest off it instead of letting you do it, if you were predisposed to do so. This makes more sense because our government always seems to be in a deficit, so it needs to find other ways to generate income. Also, they know that not many employees know that they can actually add more than just the number of dependents in their family and, in essence, pretty much hold onto all of their money until tax time. This means individuals and families can do what the government does; it’s just riskier doing things that way.

The truth is that it makes sense to make some kind of payments, but how much? This one I can’t answer for you because it depends on a number of factors. One is your income. Another is your expenses. The last is how your income is generated.

Income itself is easy enough. You might know that you’re going to make a specific amount based on the previous year, thus it’s easy to estimate how much you might want to pay each quarter.

Expenses is a wild card because often smaller business generate income but because of expenses run their business officially at a loss. In these instances the business might not have to make any tax payments at all or minimal, and you end up getting money back or having your accountant tell you that you’re good. However, it’s dicey because even in a normal year you might have to buy some expensive equipment that helps your bottom line, or maybe you have lots of travel expenses this year as opposed to the previous year, even though your income is the same.

How your income is generated is another tough one to deal with. If your income is project based, it’s possible that maybe you get two large contracts a year that last only a couple of months each time. This means you might want to make two large payments a year instead of something every quarter, or maybe you figure out what your normal yearly income is and spread out the payments. But what if you get one less contract or fit one more in? The fewer contracts might mean you paid too much, the more contracts might mean you didn’t pay enough, in which case the IRS tells you to figure out your income again and make adjustments.

What are the penalties? Who knows? Truthfully, unless you’re making six figures on a consistent basis there probably won’t be any penalties at all. Also, if your business often runs at a loss you probably won’t have anything to worry about either. In either case, it pays to have an accountant looking at your income on a regular basis and following their advice. They’re not going to steer you wrong because it would make them look bad, and their advice could keep you penalty free or even put money back in your pocket.

Those aren’t bad choices.
 

Budgeting

Quarterly Estimated Tax Payments; Do You Need To Make Them?

2 Comments

If you own a small business, you may already know that there are requirements to pay something towards what’s known as a quarterly estimated tax. In essence, this is an advance on taxes you may owe by the end of the year to both the IRS and whatever state you live in.

Here’s the thing. It’s not actually a requirement. You don’t have to pay anything; you don’t even have to acknowledge it until tax time. What it offers you is a chance to get ahead on your taxes to lessen your tax liability when the new year comes.

It’s a smart thing to do if you’re making a lot of money and have a significant cash flow. By budgeting your quarterly tax payments, which are due in April, June, September and January, you lessen the impact of having to come up with a large payment by the middle of April every year, especially since you might not have any idea just how much you owe until your accountant has taken a look at everything.

However, if your income is pretty low, or you have a lot of expenses that will drastically reduce your income, you might not have to pay anything, and if you do you might get it all back. Of course it’s better to be safe than sorry, so sending something in wouldn’t be a bad idea.

This advice changes if you owe money, or if either the IRS or the state writes you asking you about it. If you had a banner year the previous year both entities might wonder why you’re not paying anything during these quarterly periods. Unless they specifically tell you that you should pay something you don’t have to worry about these letters. Sometimes they’ll send you payment coupons; once again, unless they tell you they’re looking for money you don’t have to deal with these either.

How are you handling this issue? If you want to talk more about it don’t hesitate to call our offices.