Quarterly Tax Planning for Small Businesses
The second quarter deadline for paying estimated taxes just passed, so I thought now would be a good time to discuss the estimated tax payment system and why it is important for small businesses to keep up with their tax planning each quarter. Why is this important? Because the U.S. has a “pay as you go” tax system, which means if you don’t keep up with your tax obligations as they are incurred, you will get hit with penalties and interest. This is true even if you are overpay your taxes for the year and are owed a refund come April 15!
How does the IRS break up the tax year? By quarters, and you are supposed to pay your quarterly taxes by the 15th day after the close of each quarter. This is easy to do if you make a consistent income such as a salary. You simply divide up the total taxes you will owe and send in one quarter of them each time. This becomes much harder to do if you own a business that has fluctuating revenue, which is the vast majority of businesses.
If you’re like most small business owners, you get estimated payment coupons from your accountant or tax software when you file your yearly taxes, and you simply mail them in with a check at the end of each quarter. This can be a big mistake. Why? Because if you’re revenue fluctuates, so does the amount of taxes you have due each quarter.
Let’s take a ski resort as an extreme example. The resort is only open and generating revenue for five months out of the year. Therefore, the owner owes estimated tax payments for only two quarters instead of all four. If she breaks the payments down equally, the IRS can hit her with a penalty for underpaying her taxes during the two quarters she’s operating. Other seasonal businesses such as Christmas tree vendors and summer camps have the same issue.
Most businesses are less extreme than these examples, but revenues still fluctuate, sometimes dramatically, from quarter to quarter. If you have a down quarter, you won’t owe as much in estimated taxes; if your revenue increases dramatically, you will owe more, and it’s owed immediately, not at tax time. How do you know how much you should be paying each quarter? You should send your quarterly revenues to your accountant and get the proper amount. Some accountants charge extra for this service and some include it in your package fee. Seek out an accountant that offers flat packages for businesses if you don’t want to pay ala carte.
One more thing: the IRS doesn’t make anything simple, and that includes dividing the year up into quarters. The second quarter is only two months long, and the fourth quarter is four months long! The 2016 quarters and due dates for estimated tax payments can be found on the IRS website.
