What? I have to pay taxes more than once a year? I can remember years ago, when I started doing some freelance consulting, the realization that I would need to make estimated tax payments quarterly. Although I have been a CPA for close to 30 years, I was working in the area of financial and operational consulting. I was working with massive organizations on streamlining their financial processes, setting rates, and paying vendors accurately and on time. I didn’t have to know the ins and outs of taxes and small business accounting.
I am super organized, though, so I carefully put all my receipts in a big folder. At year end I sorted and categorized them, did my own taxes, and…paid a big penalty and interest for failure to make estimated tax payments. I wish there had been someone there to help me think through how to get organized, what I needed to be aware of from a tax perspective, and most of all, HOW to do it all!
First, you need to have an idea of how much money you are making through your business. If you don’t have a systematic, organized way to calculate your income and how much you are spending, do yourself a big favor and get in touch with a qualified accountant who can help you set up a system. It doesn’t have to be expensive or elaborate, but it has to work, and you have to use it! Consistently!
Once you have a system set up, you can start doing projections and comparisons. If you are halfway through the year and expect your income to be fairly evenly distributed throughout the year, you can do a projection to figure out how much you will end up with for a whole year. Compare that number to last year. You can then compare your estimated earnings this year to last year, and what you paid in taxes last year to what you have paid in this year. This will give you a rough idea of whether or not you are on track. You need to deposit about 25% of your estimated tax liability with the US Department of Treasury each quarter to avoid being penalized at tax time.
You can pay estimated taxes online. The Department of Treasury has a website that is provided free of charge for you to pay estimated taxes. You can also use their voice response system to make estimated tax payments. That number is 800-555-3453. If this all seems a bit intimidating or you need a little more help, call your accountant for help the first time you make a deposit.