If you’re a small business owner (and especially if you’re one of our clients) you’ve probably heard mention of Estimated Taxes – the practice of pre-paying your tax balance. We know the thought of paying taxes throughout the year instead of making one lump-sum payment each April can feel overwhelming. Heck, taxes might just become the new swear word in your family once you become an entrepreneur. And we won’t blame you! But we sure will try to help. As renowned tax nerds and proud advocates of entrepreneurs, we’ve taken it upon us to try and make taxes a little less daunting. Hence this free blog dedicated to explaining accounting, tax, and business concepts, our online education, and all of the services we offer. We want you to succeed! So without further adieu, let’s dive in and learn more about why paying estimated taxes is a strategic business move. 

What are estimated tax payments anyway?

Estimated Tax Payments are payments to the IRS and your state government made ahead of the annual tax deadline (April 15 for individuals and corporations, March 15 for S-corps and partnerships). The payments are meant to be an estimate of what you’ll owe in taxes for the year. Typically four payments are made on April 15, June 15, September 15, and January 15. But in truth, you can make payments anytime during the tax year. Making estimated tax payments is all about prepaying your tax balance so you don’t get slapped with a giant bill come spring or worse, rack up penalties for late payment. 

Why should I make estimated tax payments?

To reduce (or eliminate!) the amount you have to pay when you file your taxes

The main point of making estimated tax payments is to avoid owing a ton of money when tax season comes around. If you pay your taxes in advance, you’ll owe less (or nothing!) when you file your tax return since you’ve already paid it.

To avoid owing penalties

This one goes hand in hand with the first reason. You obviously want to pay less when you file your taxes, but you also want to avoid paying any surprise penalties. For example, the underpayment penalty which will hit ya if you don’t pay enough taxes throughout the year. Here’s the lowdown on this penalty: Anyone who owes more than $1K in taxes (which is essentially saying anyone who makes more than $4K in annual profit) will be charged penalties for late payment. Taxes are due at the time when you earn the money, which is why W2 employees have taxes withheld each paycheck. Now that you’re an entrepreneur, no one is withholding the taxes for you so you need to do it for yourself. If you wait until April to pay, they are considered late because they were technically due at the time you earned the money. Bummer, I know. But, the IRS actually cuts entrepreneurs some slack and just asks them to make estimated tax payments instead of paying taxes on a daily basis based on how much they earned. Could you imagine the hassle and stress of that?! We’re not saying you have to be grateful for the IRS, but maybe, cut them a little slack like they’re cutting you a little slack? Maybe.

To help with cash flow

We hate to break it to you, but paying an arm and a leg each April and making your business cash broke is not a great business strategy. Instead, we recommend setting aside your taxes each and every month and paying it on the recommended IRS estimated tax payment deadlines. And if for some reason you don’t want to prepay taxes, at minimum, we still recommend setting aside the money so you don’t spend it. If you go this route, the best practice is to put it into a high yield savings account and earn interest on the money.

How do I make estimated tax payments?

1. First, calculate your net income. Since taxes are based on profit, you’ll need to know how much you earned, how much you spent, and what your business profits were for the allotted time period. You can use a system like QuickBooks Online (our fav accounting software), Xero, Freshbooks, a spreadsheet, or even a notepad to track this information. The important thing here is knowing your business profitability. Once you have that figured out, look at the IRS Estimated Tax Payment Schedule listed below:

• January 1 – March 30 (estimated payment due April 15)
• April 1 – May 30 (estimated payment due June 15)
• June 1 – August 30 (estimated payment due September 15)
• September 1 – December 31 (estimated payment due January 15)

2. Then, you’ll need to calculate the amount of your estimated payment. If you do not know how much to pay in estimated taxes, as your tax accountant. In general, we usually suggest making a payment of 15% – 20% of your net income to the IRS and 5% of net income to your state. 

3. Next, submit your payment to the IRS. The easiest way to do that is by using their free online payment tool, shown below. Make sure that the reason for payment is listed as Estimated Tax and that it is applied to your 1040. Even if you file a corporate return for your business, estimated tax payments are always reported on your individual tax return (the form 1040).

The next page asks you to verify your identity by using information found on a prior year tax return. This means the IRS is not asking you what your current filing status is or what your current address is. They simply want you to confirm what was reported on a prior year return so they can verify your identity with the information they have in their system. After making sure all of your personal information matches the tax return you selected, click Continue.

Tip for taxpayers who file jointly: we recommend making estimated tax payments under the name and information of the primary taxpayer listed on your tax return. So if you and your spouse file together and your spouse is listed as the primary taxpayer, we recommend making an estimated tax payment under their name, their date of birth, and their social security number. That means the page shown below should have their information, not yours. Why? Because the IRS computer system is even more ancient than the IRS’ laws. It often glitches and does not link spouses together. If you make a payment under your social security number, don’t be surprised if the IRS sends a notice saying “you claimed you made estimated tax payments, but you didn’t, you now owe us money and an insane amount of interest”. Jokes on them! You did indeed pay, you can prove it with the receipts, but it was an unnecessary and easily avoidable misunderstanding.

Continue on to the next page and enter your payment information. 

Once you’ve confirmed your payment information, you can submit your payment. Make sure to save a copy of the payment confirmation for your tax records. You can either take a screenshot or print the confirmation page to a PDF. Additionally, the IRS website gives you the option to email a receipt. We recommend saving the PDF copy to your computer and having the email receipt as a backup file. Then when it comes time to file your taxes, send your estimated payment confirmations to your tax preparer so that they can enter your payments into your tax return and give you credit for all the money you’ve now prepaid.

4. Submit your payment to the state.

To do this, go to your Secretary of State’s website. Most states follow a similar process to the IRS so hopefully it will feel a bit more familiar now that you’ve already gone through the IRS payment process. 

Ok we know that was a lot. And it’s probably overwhelming to have to learn taxes a different way. I mean it’s always been April 15th, right?? And that’s not even mentioning the whole money part of it all. But here’s the deal, doing the hard stuff now, actually will SAVE your business later. And as always, if you have questions, we have answers! We can give you as much or as little help as you want. Anything ranging from a 15 minute tax strategy call to full on done-for-you tax preparation. We’ve got your back!