How to pay your Quarterly Tax Payments with no CPA!
You do NOT need a CPA to send your Quarterly Tax Payment!!
So...How do Quarterly Tax Payments work?
As an Entrepreneur, nobody is withholding taxes for you.
And Uncle Sam wants to get their tax payments throughout the year...not just once a year.
So they require us business owners...to make Quarterly Payments.
Those payments are based on estimates of what you owe in taxes.
What happens if you estimate incorrectly?
IRS hits you with an underpayment penalty.
Let's try to avoid those...with 3 simple calculations to make these payments
Reminder...these calculations are based on the Federal TAXES OWED (line 24 of Tax Return Form 1040)!
So for simplicity, here is an EXAMPLE:
...in 2022...let's say your IRS federal tax bill was $40,000
To avoid penalties...you pay whichever of these next 2 formulas are LESS
#1. 100% of your prior year tax liability ($40,000 in our hypothetical example)
#2. 90% of your current year tax liability
this means if something happened in your business...sales are down...profits are down...and now you are on pace to only owe $30,000 in taxes
...well now you base your estimates on THIS year rather than last year...
...because if you base it on 100% of last year...you will pay $10,000 more than you needed to.
(and as a general rule...we do NOT want refunds...that means you gave your money to IRS as an interest free loan...let's avoid that!)
So those are the 2 main ways that you calculate your estimated payments (a 3rd factor is coming but let's finish this example)
So for most of us...our businesses are growing...so we will be inclined to use Rule #1.
So you take that 2022 tax owed of $40,000...
...and say, okay, I need to pay 100% of that for in 2023...4 payments...
...so divide $40,000 by 4...you will pay $10,000 each quarterly payment
April 15
June 15
September 15
January 15 2024
So if your business profits are the same or higher in 2023...you are safe from penalties because you saw how much you owed in 2021...then divided it by 4...and paid that in 2023.
Most CPAs will do this math for you...so if you owed $40,000...they will send you vouchers for $10,000 for each quarter.
#3 rule...adds slight complexity!
The 3rd part of the rule is based on your income...
...if you made more than $150,000 in AGI (Adjusted Gross Income)...
...Rule #1 jumps from 100% to 110%.
So if you owed $40,000 in 2022...but made $200,000 in AGI
Your payments are not $40,000 divided by 4...
...they are $44,000 ($40,000 x 110% = $44K)....making your quarterly payments = $11,000
So to summarize:
if you business is flat or growing...make like easy on yourself...
...Look at your 2022 tax return to see the Total Federal Tax...then divide by 4
If your business is in decline...you might want to do 90% of what you will owe
...I would recommend asking for a tax professional to help you here bc you need to estimate how much lower it will be
And if you make over $150K in income...
...look at your 2022 Total Federal Tax...increase it by 10%...divide those payments into 4.
To make the payment...go to IRS website...make the payment:
PRO TIP:
The IRS makes LOTS OF MISTAKES!!!
Label all of your payments by the quarter they are for.
Example: you are paying $40,000 ($10,000 per quarter)
Pay $10,001 in April
Pay $10,002 in June
Pay $10,003 in September
Pay $10,004 in January
So now when you log into your portal...if a payment is missing...you know exactly which payment they lost.
If you need help with these calculations...we run a quarterly tax estimate for ALL our Online Entrepreneurs for each quarter. We help you project out your tax liability throughout the year so that you know what payments are coming. And more importantly...we help you come up with strategies to reduce what you owe!
Schedule a meeting so we can help you Save Taxes & Grow Your Money!!
Best
Pat
Disclaimer: This is meant to be educational only. This is NOT advice for your specific situation. Please consult a qualified tax professional before making any changes to your tax situation.