Just when I think I’ve shared everything I know about business taxes, I come up with something else. That’s because there’s SO much to know about handling them! I’ve have learned all of these lessons the hard way but am now free from the burden of constantly being behind.
My struggle with my business taxes began in 2015. Since I had started my business in late 2013 and worked as an employee most of that year, I actually got a refund when I filed in April for the previous year. In 2014, I was working at a massage franchise part-time while I grew my practice, so my business earnings were still fairly limited and I had federal income tax withheld from my paychecks. The amount owed when I filed in April 2015 was manageable.
But 2015 saw explosive growth in my practice! I left my side job early that year and all the money I made from then on came from my practice. When I did my taxes for that year at the beginning of 2016, I was seriously distressed by the amount I owed the IRS. I had accomplished my goal of earning a living exclusively from my own practice; I just hadn’t planned how I would keep up with the taxes very well.
I knew I needed a consistent strategy to make estimated tax payments throughout the year, so I started transferring a percentage of my income to savings each week. At the beginning of each month, I make an electronic payment via Direct Pay to stay on top of this expense that gets away from me so easily. I began doing this in May of 2016 and it has worked really well. The only problem was that I hadn’t made any contributions from the first four months of the year, so I still owed a chunk of change when I filed last year.
The IRS only allows you to make estimated payments for the previous year through mid-January. Since my payment schedule starts after I file, this gap needs to be filled to stop using my credit card to pay the shortfall. This year, I’m continuing to move money into my savings every week just as I have been. I’m stockpiling it so I’ll be able to cover any debt owed when I file, then I’ll go back to monthly payments through the end of the year.
This may not be a perfect system, but it’s sustainable. There’s a chance I may have a small penalty for underpaying my estimated taxes but it will be far less than the interest that accrues on my credit card. As much as we may despise paying taxes, they’re the reason we have such a good life in this country. I’m willing to do my part, especially when I’m able to continue earning a living in the practice that I love!
How do you manage your estimated tax payments? If you don’t see a comment box below, please click the Leave a comment link to share. Thank you!