Audience: entrepreneurs, business owners, freelancers, s-corps, LLCs, sole-proprietors
I remember my first five-digit invoice; it was for $10,001. I was so stoked to know that I had earned every single dollar and it didn't go to anyone except directly to me. When I deposited it, I thought, "I'm buying drinks for everyone tonight, and I'm getting all the gadgets ever."
It was pure joy. It still is.
Earning and getting to keep all my dollars is one reason I love being my own boss. All that I invoice is for work I've done or has come through my business. I get to decide how much I want to work, how I spend the money, how I save money, where I want to be frugal, and where I want to *waste* money.
Before I make any of those decisions though, I need to make sure that I put aside enough to make my estimated tax payments.
Who pays estimated taxes to the IRS? The IRS website says:
- Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.
- Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
Paying your estimated taxes can be a bit intimidating your first time around for those who go rogue and venture out on their own, but it won't be after you go through your first calendar year. You'll get the hang of it.
Everyone has a different process, but this is what I recommend.
Get an accountant. Get a good accountant who you like and trust and takes time to answer questions and is licensed. They are worth every cent if you have a healthy relationship. I've come across some new business owners who have this funny vision that they just hand their accountant a shoebox full of receipts or all their bank statements, and they will make things happen. Um, no. That is not their job unless their firm handles your bookkeeping. Accountants - at least the way most small businesses access them - are tax experts, filing your taxes and answering technical questions. Some will do more but you should vet them. They are not necessarily business consultants unless they offer that service.
Calendar your estimated tax payment dates.
Payment Period | Due Date
January 1 – March 31 | April 15
April 1 - May 31 | June 15
June 1 - August 31 | September 15
September 1 - December 31 | January 15
*Note: If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that's not a Saturday, Sunday, or legal holiday.
Enter and itemize all expenses by the end of each payment period. If you aren't doing this with a spreadsheet of some sorts, I recommend a bookkeeping system such as Quickbooks Online or Xero. Please see my previous post on further recommendations and thoughts.
Submit your payment period financial reports to your accountant so they can calculate your estimated payment. These reports include your profit and loss statement and balance sheet. Make sure you give them enough time to calculate the payment before the due date. In short, don't give them the financial statements
Pay online via the IRS Website. Make sure you save your receipt of payment.
Rinse and repeat.
I recommend this process for most businesses because this ensures the least amount of surprises. It is costlier in that you incur the cost of your accountant doing the calculation each payment period, but it prevents heartburn from unexpected tax burden, allows you to plan, and it forces you to stay on top of your books, so year-end is much smoother for all.