What are Estimated Tax Payments? | Small Business Owner’s Guide


– Ah, taxes, so much to
know and so little time to learn it all. If you’re a small
business owner you feel me and when it comes to your estimated taxes, you’re probably thinking,
dude, don’t tell me that I need to pay yet
another thing, tell me what are estimated tax payments and why am I paying these things. Well lucky for you
because today I’m breaking down everything you need
to know about estimated tax payments for small businesses. (upbeat music) After this video you’ll know
what estimated taxes are, how to figure out how much you need to pay and of course, how to
actually make your payments. I’ve been teaching small
business owners about how to manage their business finances for over ten years, so if taxes
make you want to bury your head in the sand
and scream, don’t worry. I’m going to break this
stuff down so you understand it and maybe even feel a
little bit like a badass when you talk about it. Before we begin, I would
love to gauge where everyone is at with their tax payments, tell me, are you making your
estimated tax payments? Let me know, yes or no,
in the comments below. What are estimated tax payments? Your estimated taxes, which
are also called estimates or quarterlies, are payments that you make throughout the year towards
your final tax bill. Here’s the thing, we don’t
know how much our final tax bill is going to be until we actually file our taxes, so all
payments that we make towards our tax bill are estimates. Yeah, the IRS is real original like that. The IRS doesn’t want to
wait around to collect your tax payments, less
because they have a deep burning love for you and
more because they want to get your money as you make it. So this system of estimated
taxes requires that self employed people and
small business owners make quarterly payments toward their taxes which is kind of like an
installment situation. You make money and every quarter you send an installment payment
on what you’ve earned to the government. Now, even though this is a requirement, estimated tax payments
are actually really good for your finances. It spreads your tax payments
out across the year. Taxes can get very very
expensive, for self employed folks, especially. And getting hit with a twenty
thousand dollar tax bill all at once is painful. So paying your taxes in
installments actually benefits you and your cash flow because
it ensures that you’re not sucking your business dry at tax time. How do estimated taxes work? Throughout the year
you pay estimated taxes four times, then at the
end of the year, you file your taxes. Once you file your taxes,
you’ll know how much you owe the government, this
is where your estimated tax payments come into play. All the tax payments you’ve
made throughout the year are applied to your final
tax bill, so if you owe fifteen thousand dollars in taxes and made twelve thousand dollars
in estimated tax payments, well then you just have
to pay the difference, which is three thousand dollars. On the flip side, if you
overpay your estimated taxes, then you get a refund. It’s like the holy
grail of tax situations, or you can skip the refund
and apply the overage to your next estimated tax payment. That’s right, estimated
taxes never go away. Because they are based on tax year, every year you’re going to have to make a series of payments, so settle in because you’re gonna be doing this for awhile. Who has to pay estimated taxes? If you’re self-employed,
which means you have non-employee income,
then you’ll most likely need to pay estimated taxes. If you’re confused about what
self employment income is, I’ve linked to a blog
post that talks in depth about self employment income below. And before you start
grumbling, ugh, why does self employed people have
to do this when regular employees don’t, slow your roll. Because everyone is
actually in some way making estimated tax payments. Employees have taxes
withdrawn from their paycheck every time they’re paid. The difference is that
as self employed folks, we don’t get a paycheck,
which means there’s nothing to withhold, which means
that we need to take the initiative and pay our estimated taxes. Okay, but back to estimated taxes, so if you’re self employed
then you’re already well on your way to paying estimated taxes the next qualifier is
that if you think you owe more than a thousand dollars in taxes at the end of the year. So basically if your business
is relatively profitable, then you probably need
to pay estimated taxes. So what happens if you just blow off your estimated taxes? Well then you get hit with a penalty and that’s a bummer. How do I know how much I need to pay? There are two ways to
figure out your estimated tax payments. The first is by basing it on
your previous year’s taxes. After you file your
taxes, you should receive a form that tells you how
much to pay every quarter. Now, if your income is
consistent year to year, this method should work
fine, but if your income fluctuates or if you
have a growing business, which we hope you do, you
definitely want to calculate your tax payments yourself. Here’s why. Let’s say you make forty
thousand dollars more this year than you did last
year, but you’re making payments based on last
year’s numbers, well, you’re going to have a
huge difference between your estimated tax payments
and your final tax bill. Personally, I like
calculating estimated taxes in real time. I just think it’s more
accurate and it allows you to make payments based
on what you’re really earning at the moment. So how does this second method work? Well, first you need
to know your net income for the period of your
estimated tax payments and figuring that out is pretty easy. You would just run a
profit and loss report in your bookkeeping program. If you don’t have a bookkeeping
program, you subtract your tax deductions from your total income and that gives you your net income. Next, you’re going to divide
this number by thirty percent, thirty percent, yes, so
here’s why it’s so high. First, your estimated
tax payments are also going towards your self employment
tax, which is a whopping fifteen point three
percent of your net income. Your estimates also cover your income tax, your income tax depends
on your tax bracket, but fifteen percent
tends to be a good middle of the road estimate for most people. If you know you’re in
a higher tax bracket, you may need to up the
percentage to 35 percent. And if you know you’re
in a lower tax bracket, you could decrease the
percentage to 25 percent. Here’s how it looks in practice. You have 25 thousand dollars in net income for the first quarter of
the year, you multiply that by 30 percent and
your estimated tax payment is 7500 dollars. How do I make sure I have
money for my payment? So after this example,
you’re probably like what, WTF, how am I supposed
to have 7500 dollars lying around every quarter? The answer is by saving
for your taxes every month. So while you only need to
make estimated tax payments every quarter, you
should be saving monthly for your taxes. And the process of saving
monthly for your taxes is pretty similar to the second method for figuring out your
quarterly tax payments. You’ll need to know your
net income for the month and also your tax savings percentage, which again will be
somewhere around 30 percent. Then you take your net
income and multiply that by 30 percent. That’s how much you should
save for your taxes. I recommend you put your
tax savings into a separate tax savings account so you aren’t tempted to dip into it. Then, when it’s time to make your payment, you transfer the money
from your savings into your checkings and there
you go, you’ve got the money for your payments. Trust me, it’s way way
less painful this way. How do I make a payment? Now we’re to the most
depressing part of this entire process where you
actually have to part with your money, but
before we talk about how you make your payments,
let’s talk about when your payments are due. The estimated tax payment
due dates are April 15, June 15, September 15, and January 15 and any time one of these
dates falls on a weekend or a holiday, the due date will move up to the following Monday. Now how to make your
payments, first you can go all old school and pay
with a check, when you pay with a check, you do need
to include a 1040 ES form that basically gives the
government your information so they can apply the
payments to your taxes. The second way and my preferred
method is to pay online. There are two websites you can use and they both do the same thing and both of them are free for you to use. The first is the IRS direct pay website where you can pay via your bank account. And basically you just
go to make a payment, enter in your taxpayer
information and bank information, and that’s it. You’ve just paid your
estimated taxes online. The second site is the
EFTPS, which is a mouthful, which you can pay via
credit card, but there is a convenience fee. So however you pay, it’s
just important that you actually pay. And my number one tip for you
is to save for taxes monthly. That’s the thing that will
make this entire process more manageable and
you’ll be in a routine of dealing with your taxes on a daily basis, which means you’re not
going to forget about them. I have something super special for you, my biz finance survival kit. It not only comes with a
tax write off cheat sheet, but also with four other cheat sheets and checklists for your small business. You can download it for free using the link in the description below. Also in the description
I’ve linked to a bunch of resources and blog posts to help you get clearer on some of the concepts we’ve talked about today. If you liked this video, let
me know in the comments below. What was your biggest takeaway? And make sure you subscribe to my channel because every week I share
a new video about how to organize and stay on top
of your business finances. I’ll see you in the next video.

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