Tax Day May Be Over, But Don’t Forget About Next Year.
Quarterly estimated tax payments apply to any person who is receiving income but not withholding the tax owed to the federal government, such as in your W2. If you are a small business taking distributions or profits out of the business and not withholding the tax, you are most likely going to be required to make quarterly estimated tax payments. Quarterly estimated tax payments are due April 15, June 15, September 15, and January 15 for the previous quarter of your income.
It’s important that you make these estimated tax payments timely as there are penalties for non-payment of quarterly tax payments.
You may not have received any information from the IRS requiring you to pay these estimated taxes just yet because you may not have risen to the level where you were paying taxes prior to this year.
One of the places I often see this catch people off guard is when they experience a great and profitable year following a year in which they have not had such high tax burdens. The additional profit means that you will now owe these taxes and will be in for a big shock next year on April 15.
It is important to get ahead of this game to avoid the penalties and late fees, but also so that you do not find yourself sitting across from your CPA and wondering how you will pay the $40,000 tax bill.
I’ve had numerous small business clients who have experienced this unfortunate circumstance and they often ask how to avoid this.
There are two ways to avoid this issue of owing a lump sum of taxes on April 15.
1) First, make sure that you estimate your taxes appropriately. Be sure you are paying what you owe, but not a lot more. Often times, people brag about the size of their tax refund, but the way I look at it, refunds are just interest-free loans that you are giving to the government. If you can set aside a specific amount of tax money each quarter and pay just enough to cover your estimates, you will not be giving the government more money than they are owed.
2) Second, Look at forming and Arkansas LLC taxed as an S Corp. Having an Arkansas, LLC can reduce your overall tax burden and will help you manage how you pull profits and distributions out of the business. By doing this, you can ensure your compliance with the reporting requirements of the IRS.
We may have just passed “tax day,” but start planning now for your 2016 taxes.