Every year a gazillion tax preparers and tax accountants lock themselves in a room from mid-January until April 15th and push out as many tax returns as they possibly can. Tax returns that show you how much money you owe Uncle Sam or how much he owes you if you’re lucky. Included with your return, in many cases, are vouchers for you to submit on the 15th of April (if you don’t submit it with your tax return), June, September and the following January for estimated taxes that you may owe.
But they are just that – estimates. What happens when you make more money or worse less money than you did the year before? I’ll tell you – these estimates need to be adjusted.
The tax law requires that if you are a sole proprietor or self-employed, a partner in a partnership or limited liability company or a shareholder in a S-corporation, and you expect to owe tax of $1,000 or more, than you must submit estimated tax payments. If you are a corporation that number changes to $500. To complicate things even more, these estimated payments must equal the smaller of 100% of the prior year’s tax or 90% of the current year’s tax to avoid an underpayment penalty.
You don’t want to pay taxes let alone penalties and interest.
Enter tax planning.
Tax planning is the process of analyzing your expected annual income and estimating the amount of taxes you will owe on that income. This process ensures that you do not have any surprises on April 15th. The best way to avoid these unwanted surprises is to look at you financials periodically to make sure that your revenue is in line with what you estimated it to be. If you are tracking to make more money than you originally planned, you have the opportunity to adjust the estimated tax payments accordingly. Don’t wait until it’s too late.
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