You know tax time will come every year, but for some it comes four times a year. That’s right…quarterly taxes are due four times a year for those who expect to owe $1,000 or more at tax time.
The trick is determining your tax liability, which can be tricky when done right.
To do it accurately, you need accurate records and a tax pro. And even then, it’s not precise. Especially if you’ve experienced a growth in your revenue this year, as many business owners have. And even more especially if you’ve been listening to us and have started paying yourself a living wage!
One of the things that make projecting your taxes difficult is the fact that your tax liability is affected by multiple factors, like income from other sources, marital status, family size, medical expenses, homeownership, etc. And since the end of the year has not arrived yet, you have to forecast (or guess) what your profit will be at the end of the year.
To simplify knowing how much to pay in quarterly estimated taxes, the IRS wants you to pay the tax balance for the previous year in quarterly installments (or 110% of the previous year’s tax balance if your adjusted gross income is greater than $150,000 if married filing jointly). These installments are due by mid-month in April, June, September, and January for the 2022 tax year.
But what happens if you have a revenue spike? While the IRS’s method is designed to be simple, it doesn’t account for drastic changes in income or profit. Its method will help you to avoid a penalty, but you still must have the remaining tax balance paid by April 15.
As stated earlier, the way to get the most accurate estimates for your tax liability if your income spikes is to have a tax planning session with a tax professional who can give you estimates based on accurate and up-to-date financials.
But here’s a simpler way to stash away extra dollars for taxes in the event your income increases so you don’t have to worry if your tax estimations are a bit off: Use the Profit First system.
Generally, we set aside 15% of revenue for tax reserves. Being that this system is based on percentages, the amount in your Tax bank account will vary in proportion to the income that you generate. If you make a little money, you’ll have a small amount in the Tax account. If you make a lot, then you’ll have more in your reserves. Which is exactly what you need.
This is by far, the simplest system to making sure you always have enough in reserves to cover your income tax liability, no matter how much or how little you earn. Continue to make your quarterly estimated taxes based on the tax liability from the previous year, and you should have ample cash in reserves to make up the difference if needed.
To get the most accurate percentages to set for your Tax account (and any of the other core accounts), we’d be happy to help. Just reach out for a consultation.