This year has been anything but normal. It has presented us with uncertainty and unexpected challenges. I believe it has also taught us resilience and to refocus on what matters most in our lives. It has been amazing to me to look at how individuals, families, and businesses have adapted in a positive way. Particularly small businesses who have leaned into the changes and are experiencing massive growth.
This is a great thing but can be overwhelming and difficult to navigate. One of the first questions people typically have is, what are they going to do with this increase in revenue? The next thing is usually how do taxes come into play and how much am I going to get screwed by the government. Luckily, implementing some of the following strategies can help you navigate the tax code and hopefully save you some money.
In general, people usually want to get money back from the IRS instead of owing but I say do your best to not owe and receive a small refund.
If you are an employee working for a company, estimating taxes is not something you need to concern yourself with. Once you become a business owner, your perception and knowledge about taxes change since they become much more important. You need to understand the tax code and how your decisions affect your bottom line.
Regardless if you are an employee or an owner of a company, you need to know how much income you expect to have for the year. Use your gross household income, minus any pre-tax retirement contributions and standard deductions, to arrive at your taxable income. This number will be compared against the marginal tax rates applicable to your household.
The above scenario is pretty straightforward. There aren’t a lot of moving parts and you can gather this information from your paycheck or P&L if you have fairly consistent income for the year.
The purpose of this article is to focus on business owners experiencing high growth who are self-employed. This includes sole proprietors and partnerships. This mostly includes anyone who is not receiving a w2.
The more money you make the more complicated things get, particularly around taxes. If you are a glass half full kind of person, this also creates an opportunity for you to save more money and build more wealth to live the life you want!
Estimating taxes are a necessary part of owning a business, being self-employed, or even selling an asset for a substantial gain can trigger estimated tax payments. The bottom line is the government wants their money. They want you to pay what you owe on a timely basis from any source of income or capital gain that you have. If there is no mechanism for this, such as payroll deductions for income, you need to send in estimated tax payments.
When are estimated taxes due? These are due on a quarterly basis in April, June, September, and January.