As entrepreneurs, navigating the world of taxes can be daunting, especially when it comes to understanding tax estimates. It’s a topic that often raises questions and concerns among business owners, whether seasoned or just starting out.
Understanding the Basics of Tax Estimates
Tax estimates are quarterly payments made to the IRS to cover income taxes that aren’t withheld from our paychecks. The IRS requires these estimated payments to be based on the previous year’s tax liability, not the current year’s income. This can catch many off guard, especially if they experience a significant increase in profits.
The Safe Harbor Approach
To avoid underpayment penalties, the IRS expects us to pay at least 110% of our previous year’s tax liability in estimated taxes. However, there’s a strategic approach here.
- While you should aim to meet the safe harbor threshold, it’s not necessary to overpay.
- Consider making minimum payments and set aside the rest in a separate account.
This approach provides flexibility in case of unexpected changes in your income throughout the year.
Navigating the Double Whammy of Tax Season
April 15th often brings us a double whammy. Not only is it the deadline for filing our taxes, but it’s also when the first quarter estimate is due. This can catch many of us off guard, leading to unexpected financial strain, especially if we do not have accurate estimates on our hands. That’s why working closely with a tax professional throughout the year is crucial. They can help you anticipate these payments, plan accordingly, and avoid any last-minute surprises.
In conclusion, while tax estimates may seem overwhelming, they’re a vital aspect of our financial management. By understanding the basics, adopting a safe harbor approach, and staying ahead of deadlines, we can navigate every tax season with confidence and peace of mind.
CPA on Fire is a full-service CPA firm that specializes in building financial engines for fast-growing, 7 and 8-figure entrepreneurial companies.
We offer far more than just vCFO services or specialized tax services. Our clients are driven, brilliant CEOs/Founders who are achieving great things. We provide companies a top-tier financial team at a fraction of the cost, enabling faster scaling and wealth maximization throughout.
Like to know more?
Download a copy of Ron Parisi’s books Financial Superpowers and The Entrepreneur’s Tax Playbook at https://cpaonfire.com/.
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