Estimated taxes are due on September 15th. Hopefully, you’re not one of those business owners who got a rude awakening with their tax bill. If you are, it’s okay. We’ve all been through it – especially when we were just starting out.
That being said, there are certain things you can do to make sure your estimated taxes don’t catch you by surprise. Honestly, there’s nothing worse than coming up short and needing to scramble to pay your bill. Here are some tips based on years of freelancing experience.
Know when they’re coming.
When someone is just starting out in business, they probably don’t know about estimated taxes. I sure didn’t.
In short, estimated taxes are quarterly payments you make to the IRS. They are the replacement for federal withholding on paychecks. In the U.S. we’re supposed to pay taxes as we go, so estimated taxes are the self-employed version of that.
Usually, you don’t have to pay them the first year, but it is something you have to do every year thereafter. The due dates are roughly the same every year as well and you can find them on the IRS website.
Know you’re probably forking over at least 15 percent.
When someone has an employer, the employer covers a part of the employment tax for their employees. When you’re self-employed, you have to cover the whole thing. This means you’re looking at possibly forking over at least 15.1 percent.
Of course, this depends on how much you’re earning and what you’re profit is. However, at the bare minimum, you need to prepared to fork over at least 15 percent in your estimated taxes.
Work with an accountant.
Look, there comes a point where business owners are better off hiring an accountant for their tax purposes. Quite frankly, you don’t have time to be figuring out tax law and there are tons of nuances. For example, if you make below $X then you only owe Y percent instead of the full Z percent.
In other words, taxes can get really complicated really fast. That’s why all business owners should consider hiring an accountant for tax planning.
It’s because I have an accountant that I know how much I need to save for estimated taxes every quarter. It’s also because of my accountant that I knew to pay my estimated taxes early this quarter due to an impending hurricane.
Before I hired him I felt like I was playing a guessing game. Now at least I know what to expect and I can plan accordingly.
Save as you go.
Perhaps the most efficient way to ensure estimated taxes don’t catch you buy surprise is to save as you go. Read: Don’t spend all the money you make because it’s not all yours.
When business owners are first starting out, they make the mistake of thinking all their business revenue is theirs. Sadly, a portion of that belongs to Uncle Sam. Your job is to figure out what that portion is, budget accordingly and save the money.
Final Thoughts
Estimated taxes are par for the course when running a business. By using these tips, you’ll ensure you’re not caught by a surprise bill.
