The Easiest Way to Avoid A Huge Tax Bill
So, your business has finally taken off…you’ve hit your peak in sales, you’re bringing in thousands of dollars monthly in your business, your products and services are selling out left and right and you’ve literally slayed your revenue goals each quarter, yaaaassssss!! *Hit the money dance LOL! Life is good huh? Yes… it’s all good until tax time comes around and you find out that you owe about 40% of your profits to the IRS. There’s no worse feeling than having an awesome, profitable year and then getting slapped with a big fat tax bill. So, how can you avoid this yearly nuisance? It’s actually quite simple: You avoid a huge bill by paying your taxes every quarter. This method is almost ALWAYS overlooked with small business owners. Hey, I totally get it…we get so caught up in getting our products out and projects completed, that taxes are literally the last thing on our mind. Well, I have a great tip for you. Today I want to teach you about the importance of paying your taxes on a quarterly basis so that you can avoid that awful tax bill at the end of the year. Doing these things below will help remove about 90% of your “tax time stress”.
Do you remember your high school and college days? Where you would know the date of your final exams and you would literally do everything under the sun instead of studying ahead of time. You would literally try to cram a whole semester’s worth of information into your head all in one night and end up with a grade less than what you planned for at the beginning of the semester? Am I right? I just described myself for sure. Well, waiting until the end of the year to pay estimated taxes is quite similar to that same scenario. At the beginning of each year, you have a great outlook on what your profits will look like, you know how you will promote and sell those amazing products and services, and you even know how you will spend the profits you earn. That type of preparation is great and very vital to your success as a small business owner, but we can’t forget about taxes. I know we have good intentions of being ahead as far as financial planning, but somehow, we always forget about taxes until TAX TIME. I know it’s the most dreadful time of the year, but if you plan properly, it’ll actually be less stressful for you. Paying taxes quarterly is by far the best tax planning strategy that you can implement into your financial goals. When you’re making your plans at the beginning of the year, factor in and set a deadline to pay your taxes. Don’t wait until the end of the year to try and figure it out.
How Much Should be Paid?
The best way to figure up how much to pay is to look at your earnings from the year before. Based on your earnings, possible deductions or credits you’re eligible for, and filing status (Single, Head of Household, Married, etc), you can determine which tax bracket you would fall in (15%-39%). Once you determine that, you should estimate at least that percentage of your earnings to be allocated towards taxes. If you’re planning to increase your revenues, factor the new amount into your estimated tax amount to make sure you don’t pay short. It will help you know what you need to put to the side. So for example, if you’re single, and your business earned $50,000 in 2015, you should set aside roughly around $6719 for the year. This means that you should set aside $1679.75 each quarter. Now, this is just an example, and it doesn’t factor in your potential tax credits and deductions that you may be eligible for.
When and How Should I Pay Quarterly Taxes?
Below are the payment periods for the taxes:
January 1-March 31st – April 15, 2015
April 1st- May 31st – June 15, 2015
June 1st-August 31st – September 15, 2015
September 1st- Dec 31st – January 15th 2016
Payments can be paid manually with form 1040-ES or they can be paid electronically directly from your bank account through www.eftps.gov. This site is a free service that is managed by the IRS. This is my personal favorite way to pay estimated taxes because the processing time is much faster and you will know when your payments have been made and applied to your account. There is also a site www.officialpayments.com that will allow you to pay both federal and state taxes simultaneously. However, this site charges 2% of your payment total as a fee for using the service.
Get a Bookkeeping System
Paying your taxes quarterly is not the funnest thing to do, but you would much rather pay them quarterly (as you earn revenue) rather than get slapped with a big fat bill at the end of the year. Your estimations may be bigger or smaller than you expected, and in the case that you overpaid, you will receive a refund. If you underpaid, you will pay the remainder at the end of the year, and that balance will be much smaller than paying the total amount all at once. The easiest way to estimate your taxes would be to get an accounting software such as Quickbooks Self-Employed, Freshbooks or GoDaddy Bookkeeping. My personal favorite is GoDaddy Bookkeeping for the solopreneur. I like it because it’s much more user friendly, it’s only $9.99 per month and it has specific tax payment capabilities (which is my favorite feature). It will help you take the guess work out of taxes by automatically organizing your transactions into categories that the IRS expects. It will even tell you exactly how much your quarterly taxes are for each quarter for your state and federal portions. You can check it out and give it a test drive here: Godaddy Online Bookkeeping.
Keeping up with your taxes and remaining IRS compliant can be a lot to keep up with, but staying organized, avoiding procrastination and having an financial tracking software will help you remain tax compliant and allow for a stress free tax season.
I hope this helps!
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