This week, Kelsey joins me to break down how to prepare for taxes throughout the year.
As tax season is coming up, we see too many business owners scrambling to pay their taxes every year and it doesn’t have to be that way. Kelsey and I give you steps for how you can prepare with estimated tax payments from the start of each year and what to do if you’re not prepared to pay your taxes this year.
In this episode, Kelsey and I also discuss:
- What are estimated taxes and why you should pay them | 1:56
- When are we required to start paying estimated taxes | 3:48
- What happens if you don’t have the money to pay your taxes at the end of the year | 5:58
- Action steps to take right now: Choosing the right method for you to make estimated tax payments | 7:28
- Keeping up with your bookkeeping to prepare for taxes | 11:04
Get the Tax Strategies Checklist -> https://kickstartaccountinginc.com/taxstrategieschecklist
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Twitter | https://twitter.com/KickstartAcct
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Full Episode Transcript:
Intro 00:00
Welcome to Entrepreneur Money Stories, the podcast for women entrepreneurs who want to dig into their money stories so they can break free from limiting beliefs around money once and for all hosted by Daniel Hayden, owner of kickstart accounting, Inc. This podcast is a series of real conversations about money mindset with valuable and action-packed takeaways for the entrepreneur who's building their abundant empire. Danielle is a reformed corporate CFO who's on a mission to help rule-breaking female entrepreneurs understand their numbers and gain the confidence to create sustainable profits. And now here's your host, Danielle Hayden.
Danielle Hayden 00:38
Welcome back to another episode of entrepreneur money stories today. We have Kelsey back on air. Kelsey, thank you so much for being here.
Kelsey Chester 00:47
Thank you so much for having me. As always, I love coming on the podcast.
Danielle Hayden 00:51
So I would say that we're really excited about today's episode, but we're not, so.
Kelsey Chester 00:56
But this is a question that we get a lot. So we wanted to put this resource out there for you guys.
Danielle Hayden 01:00
Yes, taxes are definitely our number one question that we get asked about is how do we pay estimated taxes? When do we pay it? What can we be doing throughout the year to prepare for taxes? It's really funny, I guess, you know, it hits January, through April every year. And we get so many calls at this time of year. And it's like everybody forgot May through December, about taxes completely. And we can't do that. Right. We literally, physically, legally cannot just forget about our taxes throughout the year. It is our responsibility as business owner. So the day that you formed your LLC, you became responsible for handling your estimated taxes responsibly. So let's dig in Kelsey, what is estimated taxes, like at a high level, what are we even talking about?
Kelsey Chester 01:58
Yeah, so they are amounts that the IRS requires sometimes we'll get into that, in some cases to pay in on a quarterly basis. The quarters don't coincide with the calendar quarter, they set their own schedule. But basically, you are pre- What did you say?
Danielle Hayden 02:14
The IRS always set their own rules.
Kelsey Chester 02:15
I know, right? Doing whatever we want, you just have to do it. To basically pre pay your tax liability throughout the year, versus paying it all at once when you file your return. So you're basically pre paying your tax liability through estimated tax payments. They're called estimated tax payments, because obviously, we do not know exactly how the year is going to turn out. So that's why they are we're paying an estimated payments.
Danielle Hayden 02:41
Yes. So I like to think of this. So I think this can be a big mental hurdle for business owners to grapple with, like, Why do I have to do this? And if you think about when you worked as an employee, and we've all at some point where as an employee, even if it wasn't in your high school, as you worked throughout the year, you paid taxes, that your employer paid taxes throughout the year. And so the IRS is saying that we don't want to wait for the end of the year for you to pay us. We want that money throughout the year. So that's just a mindset shift that if you were an employee of your business, you would be paying taxes. If you were an employee for another business, you would be paying these taxes throughout the year. So just a little bit of a mindset shift for anybody who's struggling with that. Right. So who has estimated taxes, right? Like how do we know if we if we are in our first year of business? Should we be paying estimated taxes or when are we required to start paying estimated taxes?
Kelsey Chester 03:49
So the IRS sets a certain dollar amount every year for one you are then required to pay estimated tax payments the following year. So for 2022, that amount is $1,000. So if you owed $1,000 or more, when you filed your tax return last year, then you would be required by the IRS to pay and those estimated tax payments the next year.
Danielle Hayden 04:11
So this is your first year in business and you have not filed a business return yet, it is suggested by the IRS that you pay estimated taxes throughout the year but you are not required to pay because you haven't had that profit that is requiring you to pay in. Now. Kelsey and I were chatting before we pressed record that we we do have very strong opinions about saving for taxes. We watch too many of our clients get caught off guard. This surprise bill that happens every January and we don't want it to be a surprise bill for you. And so it is really important that you are working with your money team to set that money aside. So if it's your first year in business, you are going to oh my In taxes, there's no way around it. If you are profitable, you will owe money in taxes, grapple with it now you're going to owe money, it doesn't matter if you don't want to, You're stalling. So it is important that you're working with your money team to estimate those those payments and make sure that you're saving throughout the year, so that you've had those funds
Danielle Hayden 05:19
available for you and your business.
Kelsey Chester 05:22
That's right. Preparing is key here.
Kelsey Chester 05:24
Fear not! You're not going to get arrested or anything like that. You know, I see a lot of clients totally freak out about this, but it's not the end of the world, you do just get charged a smallish penalty from the IRS. It's currently three to 5% depending on your business type. But you'll basically just get assessed a penalty that will be included in the amount that's calculated do with your return as a penalty for not paying throughout the year. And that's it, there's no no further repercussions of not paying it estimated tax payments.
Danielle Hayden 05:24
Absolutely. Now, we do understand that despite being encouraged to save for your your your taxes, you might be hearing this podcast too late. And you might have had a awesome year last year, but you didn't know about it because you weren't doing your bookkeeping throughout the year. And when you finally talked to your money team and had to catch up complete, and you're looking at your last year's financials, you found out a profitable and I have a tax bill. Because what happens if we don't have the money to pay our taxes at the end of the year?
Danielle Hayden 06:32
And if you don't have the cash to pay when your tax return is filed, there are payment plans with the IRS. So please do not avoid your tax return. Just because you don't have the cash. You know, there is an interest, right? It's an interest rate loan. But there are ways to make payments into the IRS. After you've you've filed your tax return.
Kelsey Chester 06:53
That's right, the IRS is really good about allowing payment plans for amounts due that way you're considered current and you're not assessing penalties on top of your amount due.
Danielle Hayden 07:03
Alright so, we want to, we want you to walk away from this episode with specific strategies that you can go and implement right now. This is not a theory episode, there is action steps for you to be able to take right right now. So the first step is to choose the method of your your payments that you are going to make for 2023, you have two options, you can pay the amount due on your voucher. So when you file your previous your tax return, you will receive a set of vouchers with the amount due. And that is the amount that you can pay on a quarterly basis. And then you can save the rest in a separate tax savings account as you work with your money team. So if you're having a really profitable year, and you're more profitable than last year, you are going to end up owing more money than what is on your voucher. So you can pay the amount on your voucher and save the rest because you never know what's going to happen, right? quarter four could be a complete dud. So you might be really profitable, and then total mess in quarter four. So if you pay that money into the IRS, you'll have to wait for a refund. Whereas if you've just been saving that money in a separate checking account, you'll still have your cash. And then the other option is to pay into the IRS as you go based on this year's income. We have clients who do both right so some people who are not comfortable with having their cat the cash in their possession. They are spenders, they know they're spenders and they want that money out. Those clients of ours will actually pay the money into the IRS using this year's net income. And other people say you know what, I am not giving the IRS an interest free loan, I'm going to hold on to that money until the end of the year because I don't know what quarter four is going to look like. And so I need to I need to save that that cash,
Kelsey Chester 09:01
Both methods do avoid the penalty. It's just whichever works best for you and your business and your cash. Yeah, I do want to note, you know, you might be asking, Well, where do those amounts and the vouchers come from they are based on last year's income net income. So that's why she said if you make a lot more this year, and that net income is going to be higher. If you pay the amounts just on the voucher you will end up owing more since you did make more this year. So that's where the option comes in. You can pay that estimated additional amount to the IRS or hold it in that savings account for yourself.
Danielle Hayden 09:35
Alright, what's next? What can we take action on?
Kelsey Chester 09:38
Yeah, so, another thing you can do is sign up for electronic payments. So I know at least federal you can sign up for automatic electronic payments where they automatically debit the quarterly estimated amount that way it's all done. It's done on time and you don't even have to think about it. So that's definitely an option as well. And you can set that up with your tax preparer.
Danielle Hayden 09:57
The next thing we want you to do, step three is to know the dates, right? This is really important for you to put the dates in your in your calendar, especially if you're not working with with a specific Money Team, our clients that kickstart accounting, get a reminder email notifying them that this date is approaching and to pay that mountain on the voucher into the IRS. However, if you are not working with a Money Team, if you're not working with somebody who is going to make sure that you remember that date and most tax accounts don't do that, I would highly recommend you setting that date in your calendar with a reminder like a week or two beforehand, so that you have the cash set aside and that you're ready to to make that payment.
Kelsey Chester 10:43
Another strategy that you can implement is to make sure that you keep track of the payments that you sent in. So your tax preparer is going to ask for the amount that you sent in and the date that you sent them in. So you want to make sure that you have that information handy as it is gonna affect the way your entire tax return is calculated.
Danielle Hayden 11:02
Next up is that we want you to be doing your bookkeeping, so that you know what you owe and what needs to be saved. So that is tip number five, right? It is do your bookkeeping right now, right? Like this is your reminder message from the heavens, your darn bookkeeping you're doing DIY, make sure that you are getting into QuickBooks or your accounting system, processing your transactions, reviewing your statements, if you are working with your money team, you should be getting a set a financial statements on a monthly or quarterly basis, make sure that we're not going to spam, actually, you are actually reading our emails, and that you are digesting that information. So it's not enough just to say, hey, I have a money team, they're handling the bookkeeping. I don't have to do anything else. Like that's not true, you actually have to do something, you have to actually open the email, you have to actually read it. And then once you see at the bottom of the email where it says your tax reserve is you then need to go and pay the IRS or transfer the money. So know your numbers.
Kelsey Chester 12:14
That's right. Like we said, Being prepared is key. So making sure that you're reviewing that financial information, and that estimated tax amount is going to be really important to make sure you are not surprised when you file your tax return.
Danielle Hayden 12:25
And then lastly file your taxes on time. I can't tell you how many times throughout the years, we've worked with people who avoided their tax return and it comes quickly right like the countryside, the days are slow and the years are fast. Country lover. It's true, right? That our years fly by and we have a responsibility to make sure our taxes are filed. And if you file them on time, you will have the vouchers to then be able to pay the right amount throughout the year. If you don't pay them on time you go on extension or you avoid your taxes altogether for years on end. You are accumulating penalties interest and-
Kelsey Chester 13:11
Digging yourself on a deeper hole, you know?
Danielle Hayden 13:13
Yeah, yeah, it it compounds, it just keeps on compounding. So it's not too late. This, you know, talk to your tax preparer. If you need assistance, we're always here to be a resource for you. You can book a call to talk to Kelsey and I kickstarted county inc.com There'll be a blue button there that says book a call. And we can talk about your specific situation and help you start crawling out. If you have dug yourself a little hole, we will help dig you back out and help get you out of that overwhelm.
Kelsey Chester 13:44
That's right, I really want to emphasize that if you're listening to this episode, and you're like, oh my gosh, that's me. I haven't filed my return in two or three years. That's okay. We've got you! Book that discovery call, we're more than happy to talk through our options, we can absolutely go back and recreate the years so that you can get that return filed, get it all dealt with and then never have to be in that type of situation again moving forward.
Danielle Hayden 14:06
Alright, go take action. This is your reminder right now take action. Do not do not avoid these steps. It is your responsibility to make sure that this is this is complete as a business owner. You've been armed with the information now and now it is your job to take action. And if you have questions, we're always here to be a resource. So thank you for being here. Until next time!
