| Do you have trouble calculating quarterly | | | | make a reasonably accurate quarterly estimated |
| estimated tax payments? Here are some helpful | | | | tax payment instead of just "winging it" and |
| tips to make the process much easier and less | | | | paying too much (or too little). |
| stressful. | | | | OPTION 2: |
| If you're newly self-employed and unfamiliar with | | | | Here's another great way to take care of your |
| the IRS' estimated tax payment schedule, here | | | | quarterly estimated tax payments. Option 2 is |
| are the due dates for the Year 2009 quarterly | | | | what the Tax Code calls "The Safe Harbor |
| estimated tax payments (made via Form | | | | Method," defined as follows: |
| 1040-ES): | | | | The Tax Code says that most taxpayers can |
| QTR 1: April 15, 2009 | | | | calculate the minimum amount of estimated tax |
| QTR 2: June 15, 2009 | | | | by paying the previous year's tax liability in the |
| QTR 3: September 15, 2009 | | | | current year. Let's say you are trying to figure |
| QTR 4: January 15, 2010 | | | | out how much estimated tax to pay for Year |
| By the way, I have no idea how they came up | | | | 2009. Let's also assume your Year 2008 federal |
| with these "quarters" -- the first quarter coincides | | | | income tax liability was $10,000. For Year 2009, |
| with the calendar quarter, but the other three | | | | you take the $10,000 and divide it by 4, and you |
| don't. Two of the "quarters" aren't even three | | | | would pay $2,500 per quarter. |
| months. Go figure. | | | | Now that wasn't too hard, was it? As you can |
| Still with me? Good. Let's get down to business. | | | | see, this is a much easier method to use than |
| If your business income fluctuates from year to | | | | Option 1, because it takes less time to calculate. |
| year, as is often the case for the small business | | | | There is another advantage to The Safe Harbor |
| owner, it can be difficult (if not impossible) to | | | | Method: if your income (and resulting tax liability) |
| know your tax liability until the year is over. So | | | | increases in 2009 compared to 2008, you can still |
| many self-employed people end up being too | | | | pay the 2008 tax liability amount in 2009 and not |
| conservative. They fear having a balance due on | | | | incur any penalty or interest for having a balance |
| their tax return and pay way too much estimated | | | | due on the 2009 return. |
| tax during the year. They end up just like the | | | | As long as you pay that Year 2009 balance due |
| W-2 employee who has too much income tax | | | | by April 15, 2010, it doesn't matter how much |
| withheld from his/her paycheck. The end result -- | | | | you owe on the 2009 return. You have complied |
| the self-employed person also gets a large refund, | | | | with the "safe harbor" rule for quarterly estimated |
| and has given the IRS an interest-free loan of his | | | | tax payments. |
| hard-earned money. Not good! | | | | So Option 2 lets you calculate your estimated tax |
| The self-employed person has two options to | | | | payment amount in literally seconds, and it also |
| avoid overpayment of estimated tax. | | | | lets you "get away" with paying a minimum |
| OPTION 1: | | | | amount of tax during the year without any fear |
| Do your best to track your income and expense | | | | of penalty for waiting until April 15 to pay the |
| during the year. If you are running a successful | | | | rest. |
| small business, you should be recording your | | | | Practically speaking, Option 2 is often best for |
| income and expenses each month, and you should | | | | self-employed people whose income remains |
| be able to produce reports that tell you exactly | | | | relatively constant from year to year. If your |
| how your business is doing each month. Either you | | | | income dramatically increases one year, keep in |
| are doing this yourself with the help of a | | | | mind that you can still pay the previous year's tax |
| software program or you are paying a | | | | liability and hang on to your money for a few |
| bookkeeper or accountant to do this. | | | | extra months, but eventually you will have to |
| The point: if you don't know what your bottom | | | | come up with that large balance due. If you like |
| line is every month, you are making a big mistake! | | | | waiting until the last possible day to pay your |
| If you are waiting until the end of the year to see | | | | balance due, then Option 2 is for you. Just make |
| what the numbers look like, you are mismanaging | | | | sure you "put something aside" to take care of |
| your business. | | | | that large balance due. |
| This monthly financial summary is essential both | | | | Also, please notice that I said that "most" |
| from a business management/cash flow | | | | taxpayers can pay last year's tax liability to qualify |
| standpoint, and also from a tax standpoint. From | | | | for the Safe Harbor method. If your income is |
| a tax standpoint, once you know your profit for a | | | | over $150,000, then the amount of estimated tax |
| given quarter, you can then calculate the resulting | | | | you are required to pay is 110% of the previous |
| tax liability on that quarter's profit, and you can | | | | year's tax liability, not 100%. |