What Your CPA Wants You to Know
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What Your CPA Wants You to Know
105. All About Estimated Tax Payments!
Ever been shocked by a massive tax bill in April? Let's not let that happen again! For business owners, freelancers, and anyone with significant non-W2 income, estimated tax payments necessary.
The IRS rules have changed in recent years. While the IRS used to charge around 3% for missing these payments, that penalty has increased. Now more than ever it is important to make your estimated tax payments!
The good news is that navigating estimated tax payments is manageable with the right approach. In this episode we walk you through how to make estimated tax payments and answer all the common questions we receive about them.
Take control of your tax situation by planning ahead. Your future self will thank you! Share this with a friend who complains every April about owing too much – you might just save them from the next tax-time panic!
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This will apply to pretty much everyone listening to this, since it's a business owner podcast. But the big difference is, if you are new to being a business owner and you used to have a job that you were paid on a W-2, all of those taxes are being taken out for you. I'm sure you saw that. And then if you do switch to being just a business owner when you're not getting a paycheck, then you need to pay in.
Speaker 2:Welcome to what your CPA Wants you To Know.
Speaker 1:Tax and accounting help can be expensive, so we've created this podcast to help guide you through it all and make you feel like you have a CPA in your back pocket. I'm Carson Sands and I'm Taryn Sands.
Speaker 2:I'm a CPA with over 10 years of experience helping people start and grow their businesses.
Speaker 1:And I'm an MBA with a specialization in marketing and entrepreneurship. Taxes suck and we want to make sure you don't pay more than your fair share.
Speaker 2:We're here to share everything your CPA wants you to know in a fun and easy to understand way. Let's get started.
Speaker 1:Let's do it All right. We are back after a short break. We just got back from a long family vacation, which was nice, and today we're back to talk about estimated tax payments.
Speaker 2:Yes, it was a great vacation. I didn't think about taxes one time, just kidding. I thought about them every day.
Speaker 1:It was nice because we get to take advantage of the slower time during the year, and at this point it's not necessarily slow. We still just take the time off because this time of year it's not like there's. We still just take the time off because this time of year it's not like there's a big deadline or anything. So we took the time off anyways, it was really nice and we did skip an episode, if anyone noticed. I'm not sure if anyone did.
Speaker 2:Did you cry?
Speaker 1:We didn't have any fan mail saying that we missed an episode, but we did. How?
Speaker 2:many phones do you think were shattered against the wall when people realized this week's episode did not come out?
Speaker 1:I'm sure people were very upset not to get some tax tips for the week, but sorry to disappoint everyone. We are back now and we have a very exciting episode all about making estimated tax payments, which is a very important episode that we don't have already, which is really weird, but we're going to make that right today and I think this applies to pretty much everyone listening. So today we're just going to walk through the steps to make estimated tax payments and why you need to make them, all of the things, because this is a question we get all the time.
Speaker 2:I know we have talked about it on certain episodes, but we do not have a dedicated episode to it, so that is surprising, because we try to give the listeners all the information that we give to our clients and so that if you're not lucky enough to be one of our wonderful clients then you still get a lot of that good advice. It just takes, you know, listening to a whole lot of episodes but wow, this is something we tell our clients over and over and over and most of them do it and we have never told you. I'm sure we've told you to pay estimated taxes, but we haven't given you all the details and information that you need.
Speaker 1:Yeah, we've definitely talked about it, but I was going back to send it to a client because it's way easier for me to send a podcast episode where it breaks down everything step by step and we answer questions that they don't even know to ask, and I couldn't find it, so it's buried somewhere in there. I don't know if it was with listener questions or what, but we definitely needed one that if you're scrolling and you see it, it's just easy to pick this one if it applies to you right now, and I can send it out to all of our clients as we approach the next estimated tax payment deadline. So, without further ado, let's talk about taxes.
Speaker 2:Yay.
Speaker 1:So I guess let's just start with what are estimated tax payments like? What's a simple definition.
Speaker 2:So estimated tax payments are just payments that you make to the IRS periodically throughout the year to avoid having to pay all of your taxes when you file your tax return.
Speaker 1:And this applies to people like business owners who aren't paying in all year long. So the IRS made this so that they are paying in a little bit at a time. The IRS doesn't want to wait for their money, and so that is why it applies to business owners, but it applies to freelance workers anybody that's getting into 99, things like that.
Speaker 2:Yeah, so have you ever heard people use the term quarterlies and you're not really sure what they're talking about, but you're too embarrassed to admit it? And you kind of don't think they know what they're talking about, but they're too embarrassed to admit it too. Well, this is what they're talking about. Estimated tax payments are also called quarterly estimated tax payments or sometimes just quarterlies.
Speaker 1:Yeah, I think it's funny that people refer to it as that.
Speaker 2:Well, it's because you pay them four times per year.
Speaker 1:That's true. So this will apply to pretty much everyone listening to this, since it's a business owner podcast. But the big difference is if you are new to being a business owner and you used to have a job that you were paid on a W-2, all of those taxes are being taken out for you. I'm sure you saw that. And then if you do switch to being just a business owner, when you're not getting a paycheck, then you need to pay in, and so these are your two options, basically to pay in taxes all year long. So if you're new, that's just like a little difference. It's still just paying in those taxes, but it's a little bit different.
Speaker 2:Or even if you're a W-2 employee and you don't have a business but you have significant income coming in from royalties or other investments, then you have income that you're not having withholding taken out on, like you are on your W-2 and the IRS doesn't want to wait until April 15th of next year to get that money.
Speaker 1:Right. I think that we a lot of times think of this as just for business owners, but it's really not. It's for anyone that's going to owe a significant amount when they file their tax return, because there are penalties if you didn't make estimated tax payments and you owe a lot when you file every single year. They want you to plan for that and go ahead and start making estimated tax payments.
Speaker 2:Maybe we didn't have an episode on this when we first started, just because at the time we advised that it's kind of a good idea. But it's not the end of the world if you don't. And this brings us to our next point of why they're important. At the time they were less than 3% were the estimated tax penalties. That's what the IRS charges extra if you owed taxes and you didn't pay them in quarterly payments through the year. Well, whenever all the interest rates went up, the IRS also increased what they charge you for not making those estimated tax payments. So now they're closer to 7% or 8%. And I mean I don't think anyone's getting that on a savings account. So it really makes sense to pay them now and not just let it sit in a savings account. You're going to owe the IRS more interest than you're earning on it.
Speaker 1:Yeah, that's true, that did change. So our advice changed, which isn't that funny how everything always changes and then you have to update accordingly. But I think that's probably why we didn't have an episode Now. We have just been telling our clients over and over again. You know it's not worth it, those penalties. You might as well just go ahead and make the estimated tax payments and be prepared for it, because penalties are much higher now. So if you're not sure, if you need to make these estimated tax payments, how could someone look and see?
Speaker 2:A real quick way to do this is especially if your tax return for this year will be the same or very similar to last year. Just go back and look at what you owed, and if you owed more than a thousand dollars, you probably need to look into making some estimated tax payments. And now another question is okay then, how much? Well again, that is, if your income will be very similar to the previous year and I mean some people's it is, but most of our business owners it fluctuates but if it is going to be very similar, then you can just pay in however much you owed, and that should get you really close.
Speaker 1:So if you owed you know a certain amount, then you could divide that by four. You're going to cover yourself, but you really just have to look at what happened during the year and adjust accordingly. If you had a really, really good year and you doubled your income or something, you should probably add a little bit more to your next payment. If you're struggling and you're like I'm not even going to make near as much as I did last year, you can adjust. It's not an exact science, unfortunately.
Speaker 2:But let's say you have no idea what you're going to make this year and you want to go ahead and pay in something. Well, the IRS does have what's called the safe harbor rule and that means that if you pay in a hundred percent of what you owed in the previous year, or 90% of what you owe this current year which of course that's impossible to calculate because you don't know how much you're going to make, but still a hundred percent of last year's tax, you make that in quarterly payments through the year and the IRS won't penalize you. So even if you end up making a lot more money and you still owe, then you at least won't be penalized for it. Now, one addendum to that is that it's actually 110% of last year's taxes if you're a high income earner. But the best option, of course, is to get a tax projection. If you have a CPA that you're working with and they do tax projections, that's the easiest way.
Speaker 1:If your CPA doesn't do tax projections, then get a new CPA and then have the new CPA do a tax projection for you and I'm sure for most CPAs do this the firms I worked for did. When you print out the tax return and you send them, it will usually give you an estimate to what you should pay based on previous year's numbers. So that does give you a good start.
Speaker 2:That's what we always provide it. We always provide the safe harbor numbers and then usually that is going to cover your first two payments, because typically we don't do a tax projection before those first two payments are due. We'll talk about those due dates in a minute, but by the time the third and fourth tax payments are due, a lot of times we've done tax projections for people, so we're revising those estimated tax payments as we go through the year.
Speaker 1:So we did say that they are sometimes called quarterly, so if that gives you any indication when they're due, these are going to be due every quarter.
Speaker 2:Except not.
Speaker 1:Well, yeah, so it's. It's a little bit confusing, but we'll go into that. So what are the due dates for these? And just know that they don't match up with the normal quarters, but there's a reason why.
Speaker 2:So the first one is due 15 days after the end of the first quarter, so that's April 15th. Makes total sense, right? So the next one is ooh, is it July 15th? No, it's not. That would make way too much sense. It's actually June 15th, two months after the first one. So now it's starting to sound a little less quarterly, isn't it? I don't know why that's just when it is. So the third payment is due September 15th. Again, that's not after the end of the third quarter. So that's not great and it's hard to remember. And then the fourth one actually is at the proper time. It's January 15th, so it's 15 days after the end of the year. That gives you 15 days to figure out what the whole year looks like and adjust that last quarterly payment.
Speaker 1:So you just need to remember the dates. They're not evenly spaced out, and the first one is kind of rough, considering if you had to pay taxes when you filed your tax return. Then, surprise, there's another payment that you have to make by April 15th, right?
Speaker 2:Now let's say you did forget that it's June 15th because you think of quarters as quarters, the way a normal human should. Well, if you paid it July 15th, are you going to prison? No, Are you going to have to pay every dollar you have in your name as a penalty for this? No, In fact, paying July 15th, you'll still be in pretty good shape. You're going to have one month of penalties there. It's not the end of the world. They do whatever. The rate is 7% or 8%, they do divide that by 12. And so you're only really getting charged that full amount if you're a whole year late for your tax payment. So if you're just a month behind, it's whatever. It's less than 1% of whatever you owed for that quarter.
Speaker 1:And that is the question that everyone always asks is how do they know what you owe for that quarter?
Speaker 2:Ah, they don't know until you file your tax return, and then whatever you owe divided by four, and then that's what you were supposed to pay.
Speaker 1:There you go.
Speaker 2:So that's when they would apply the interest on the payments, because then they know what you were supposed to pay and you didn't, right? Well, or it was late, right. Okay, be honest. How's your bookkeeping going?
Speaker 1:If you just cringed a little, this is for you.
Speaker 2:We created a monthly accounting program where you hop on a one hour call with us every month to tackle bookkeeping, tax planning, business decisions, basically anything you need.
Speaker 1:The best part of this is it's at a reduced hourly rate so you can easily budget for your accounting help. And because we love our clients, we throw in a free annual tax projection so you're prepared every April 15th.
Speaker 2:Our clients love this plan, so you're prepared every April 15th. Our clients love this plan. It's perfect if you're doing your own books but want an expert watching over your shoulder and training you on everything you need to do.
Speaker 1:We have all the fine details in episodes 101 and 102 of this podcast if you want to check it out, or just email us at carson, at sansconet.
Speaker 2:Now back to the show at sansconet.
Speaker 1:Now back to the show. Okay, so that is the first confusing part. Well, the first two how to actually calculate what you need to pay in is a little confusing. And then the due dates a little bit confusing. But what also trips people up when they're asking and emailing about this is how do they actually make this payment? So let's walk through how to make the payment. Once you've decided how much you want to pay and you know the due date like how would somebody actually make an estimated tax payment?
Speaker 2:So one of the easiest ways is online through IRS direct pay, especially if you're using a bank account. Then they don't even charge you a fee or anything. You just make the payment directly out of your account. I believe you can use a credit card. They do charge fees for that. So I don't know, unless you're getting a whole lot of miles or something for it, it's probably not worth it.
Speaker 1:So on the IRS website.
Speaker 2:Yes, or you can just mail them a check. The address depends on which state you're in. You can look it up online really easily or, if you do work with the CPA, you can just ask them. That's it. You can print these little vouchers off from the internet or we give them to people in their tax return in case they do want to mail a check. You don't have to use that. You don't have to send it with the voucher. If you just figure out which address you're supposed to send it to, you can just mail one check directly to that address. But you need to make sure you write in the memo line that it's for the 2025 tax year third quarter and put your social security number on there.
Speaker 1:I actually do like people to use the voucher because it has all of those directions on it. So if you locate, 1040-es is what you're supposed to send in with your check. If you're mailing a check in, it will tell you who to make the checkout to, what to put on the memo line, all of those things, and I mean people have those questions. So I think you might as well just get the voucher if you're sending a check.
Speaker 2:That's true, and it does have the instructions, the mailing address and exactly what to write and where to write it on the check. Now, if you think that the voucher is going to keep you from needing to put all that information on the check because it's on the voucher, that is not the case, because Bob will open up the envelope and take the voucher and he'll hand bill the check and they'll get separated and then the check won't have. You know what the tax is for and they'll just guess it happens all the time. They'll just put it towards whatever tax year and they'll be like oh, you're overpaid for this year and you're underpaid for this year by the same amount, but they won't know that those two amounts are supposed to be. They'll never put it together that there's a reason you're overpaid one year and underpaid another year by the exact same amount. So just make sure you put the right information in the memo line so you don't get those nasty letters.
Speaker 1:I've seen a lot of messes.
Speaker 2:Yes, can you tell from the sound of my voice that I've seen this stupid mistake happen a lot of times, and I'm not saying the clients were stupid. I'm saying it's stupid that the IRS can't figure out that when you're 10,000 underpaid in 2023 and 10,000 overpaid in 2024, they can't seem to figure out what happened.
Speaker 1:Right, yeah, there's a lot of people applying the payments to the wrong tax quarter or the year or whatever, and making a huge mess which is really hard to sort out, so make sure that you follow those directions, but they always threaten that if you're underpaid for a year, they can take over payments from another year to cover it.
Speaker 2:And but they never do. They just harass you forever about it, like, no, just take the money, you have my money. You just don't give it to me, keep it, put it towards the other thing that I owe for. Anyway, now I'm getting off on a tangent.
Speaker 1:Yes, yes, you are Lesson of the story. Follow the rules and put it on your check. All right, I think we covered most of the questions that we get, but there was one question that we haven't answered yet, and that is just what happens if you paid too much.
Speaker 2:Oh, perfect. So just like if you're withholding on your W-2 is too much, if you pay too much in your estimated tax payments, you get it back as a refund. Or in some cases, if it's a small amount, then you just apply that to your first quarterly payment of the next year and you can just skip making that payment. We usually advise that one if you're going to owe estimated payments for the next year, because you'll end up having to make that payment before you even get your refund most of the time. So there's no reason to send them a check and then wait for them to send you a check. Just have it applied.
Speaker 1:And the final question, which I think confuses people quite a bit, especially new business owners, is that basically, does their business pay estimated tax payments?
Speaker 2:Only well for federal taxes only if you're a C-corp, and that's very rare. Most of our clients are in S-corps and we have some partnerships. We do have some C-corps. There's different reasons to have those. It's not always the most tax favorable but sometimes it's not avoidable. Anyway, c-corps pay income tax, which means they do pay estimated tax payments.
Speaker 1:But for most of our clients and most of you listening, your estimated tax payments are paid personally. They're not paid by your business. Everything is paid personally. So that includes if you have an LLC, which some people get confused. They think that LLC is their tax entity. If you're not sure about that, we do have some episodes on that. That clears it up. But LLC, sole prop partnerships, s-corps, all of that, yes, you would be making these payments yourself.
Speaker 2:But if you were in a state that has income tax, a lot of times your S-Corp is subject to tax. It's passed through tax, it's passed through to the taxpayers that own the business and now we're getting into some complicated nuances. But some of those entities do pay state estimated tax payments.
Speaker 1:Okay. Well, what about individual state income tax?
Speaker 2:Yes, Unless you're in one of the whatever it is now six or seven states that do not have income tax, you have to pay estimated tax payments to the state as well, and they have their own penalties that they charge if you don't make those payments.
Speaker 1:And do they have the same due dates?
Speaker 2:They do actually in almost every circumstance. Oh, of course, of course, I won't go down the list of which ones don't. You can look on your own state website, but there are a few that don't, but typically they follow the exact same deadlines as the IRS.
Speaker 1:So fun, so fun. Well, let's just wrap up this really interesting episode, which will come in very handy very soon, because September will be here before we know it. I don't know when this episode airs, but it will be before the next deadline, so that we can send this out to all of our clients and people on our email list. So I think it'll be very helpful to all of our clients and people on our email list. So I think it'll be very helpful. Remember to know if you need to pay these in. Calculate what you're going to pay in each quarter. Make sure you put those deadlines on your calendar and you can pay online on the IRS website or you can mail in a check. If you do mail in a check, make sure to find that 1040ES and put the label on your check.
Speaker 2:Put the label on the check.
Speaker 1:Well, that is all we have for you this time. If you found this really helpful and you didn't know how to make an estimated tax payment and now you do, please, please, please, send this to someone that you think could also find it very helpful.
Speaker 2:Yeah, like the person that complains every year when they file their tax return and they owe a lot. Send this to them.
Speaker 1:Yes, If you know someone who always owes, definitely this is an episode for them and until next time. Thank you so much for listening to.
Speaker 2:What your CPA Wants you To Know.
Speaker 1:Podcast.
Speaker 2:This podcast is intended to provide accounting and tax information for educational purposes only. All tax situations are unique and should be handled with the assistance of a tax professional.