Quarterly Taxes: How to Avoid the Crunch
It’s tax day!
No, it’s not time to file your income tax return again already, but if you’re supposed to be paying quarterly estimated taxes, today is the day the second quarter payment is due for 2008.
For many who pay estimated taxes, this payment is a tough one. That’s because it was just two short months ago that we had to pony up the dough for any taxes that were due to close out 2007, PLUS shell out even more money for the 2008 first quarter estimated tax payment.
What about you? Do you already have the cash available to make the second quarter payment without feeling a painful pinch?
If not, you’re not alone.
Many self-employed folks–surprisingly, even those making piles of money–come up short on cash when trying to pay their estimated taxes because of not planning ahead.
These people are then forced to send in their payments late or, worse yet, not at all. That costly strategy can really bite hard because it means facing a huge tax bill next April 15th, which can be further inflated by underpayment penalties.
Ouch!
Whenever I see small business clients headed toward this painful yet common tax trap, I suggest my simple two-step system to make keeping up with estimated taxes easy and almost painless. (Of course, we all know paying taxes is never completely painless.)
STEP 1: Use a simple spreadsheet to keep track of your estimated tax amounts.
The easiest way I’ve found to do this is to record your gross revenue in a spreadsheet. Then apply a specific percentage to that amount, say 25%. The result is the amount you should set aside for paying your estimated taxes.
The percentage you use is only an estimate as your income accumulates throughout the year, and it is unique to your tax situation.
A quick way to calculate a reasonable starting percentage is to look at last year’s numbers. Divide the total amount of your tax liability by the total of your gross revenues. Don’t forget to include ALL the taxes you paid–federal, state and local–throughout the year. This percentage is a reasonable starting point.
When your actual 2008 taxes have been calculated next April, you’ll know whether any adjustment is needed in the estimate you are using on your spreadsheet, based on whether you have money leftover or don’t have quite enough.
Now, once you’ve applied that percentage to the gross revenues you’ve pulled in so far this year, the result is the amount you should put aside to pay your quarterly taxes. Since we are already halfway through the year, subtract any estimated payments you have made so far from this amount.
Going forward, every time you receive a payment from your clients, you should update the gross revenue amount you’re tracking on your spreadsheet and it should calculate the corresponding additional allowance for taxes you should immediately set aside.
You will also want to use the spreadsheet to track your estimated payments as you make them throughout the year, including the actual dates on which you made those payments. This information will be needed to give to your tax preparer next spring.
But how do you make sure that you don’t use the money you are earmarking for taxes for something else in a moment of weakness?
STEP 2: Open a savings account just for taxes.
An online savings account is ideal for this purpose. But if you prefer, a savings account at the bank where you have your business checking account will work just as well.
By putting your tax money in a separate savings account, it will discourage you from using that money for any other purpose. As a small bonus, as your tax savings balance builds, you will be paid interest on the accumulating money.
Remember the purpose for this account is to assure that the cash is available when it comes time to make your quarterly payments. This quick and simple method is designed to mimic the ease of automatic withholdings employees get from their employers, and often allows them to look forward to a tax refund.
Using this system, you could get the same result. You may even find that your tax savings account shows “leftover” money when everything is said and done next April. Wouldn’t that be a pleasant tax experience for a change?
Bottom line: By using this simple two-step system, you can stop worrying about having enough cash to make your tax payments.
In fact, I’ve even got an incentive for you to help implement this system right now. I’ve arranged it so that you can get paid $25 just for opening an online tax savings account.
As you might imagine, I can only offer this bonus to a limited number of people, but if you’re ready to make the Smart Choice of “automatically” putting aside money for your tax payments, I’ll show you how to do it and get $25 for taking action when you click here.
Come next April 15th, you’ll be glad you did.
WANT TO USE THIS ARTICLE IN YOUR OWN BLOG OR E-ZINE? You have permission to re-publish it, as long as you include the following author’s bio and link:
Gabrielle Fontaine, PB is a freelance Professional Bookkeeper and Certified QuickBooks ProAdvisor. She specializes in assisting Internet-savvy entrepreneurs to get control of their books and maximize profits. Gabrielle also publishes the business-boosting online ezine, Smart Money Choices. Get more information at http://www.BookkeepingDirect.com
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