How Quarterly Taxes Can Help Your Business?
I know no one likes talking about taxes in general, and the constant sending of quarterly tax payments can be the bane of your existence.
But… what if I told you that if you approach this subject proactively, paying your quarterly taxes can be a genuine benefit.
First, some parameters; If you are self-employed and estimate you will pay at least $1,000 in taxes in a year, you should be making quarterly payments. If you are a corporation, that amount drops to 500 dollars.
The Key is to Estimate Your Taxes
The keyword here is ‘estimate.’ You pay taxes for the current year you are in, so this whole conversation is about making a good-faith estimate. Of course, if you overpay, you’ll get a refund. The real issue is to make sure you don’t under-pay and trigger a penalty.
In every conversation about taxes, of course, the goal is to pay as little as possible, but really the goal is to avoid penalties. This is why this is an important discussion. You may hate the constant payment, but I guarantee you will REALLY hate having to pay penalties.
Another benefit of quarterly taxes is avoiding the shell shock of seeing how much you owe at the end of the year. Four smaller annoyances are far better than one massive bill. This eventually becomes part of your cash-flow discussion every month, and you get as used to it as possible.
Benefits of Quarterly Payments
The most significant benefit of quarterly payments is better understanding your cash flow. When you are following income levels with attention to tax liabilities, you get a better picture of your financial health. This isn’t as much of an issue early in your business life, but as your business grows, this information is vital!
So how do you estimate your quarterly taxes?
- Estimate your income. This can be based on year-to-date information or past year’s results.
- Deduct your expenses from the estimated revenue.
- Figure out your income tax amount, both your tax bracket and 15.3% for self-employment taxes.
- Then take that number and divide by four.
Don’t worry too much about underpaying. There is a ‘safe-harbor’ protection in place. If you pay the same amount as last year, you won’t be penalized if you underpay.
But, as you see above, there are real advantages to paying every quarter.
Please feel free to reach out to me if you have any questions