The Blog Of TL Wall Accounting

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Archive for June, 2014

The Thing About Estimated Tax Payments Is…

Anyone who has their own business or works independently knows that there’s this thing known as estimated tax payments. They know that they have to make these payments by certain dates 4 times a year.

What no one really knows is why.

If you take a good look at the IRS page on estimated tax payments, you’ll see that they tell you to make these payments by the assigned dates (without telling you what those dates are on that page), and that, if you either don’t make payments by those dates, or don’t pay enough on those dates, that you could incur a penalty.

Does that sound ominous or scary? I wouldn’t ever go that far but it does sound like government lawyer speak, which in essence is nonsense.

In essence, there are a couple of reasons why the federal government wants you to make estimated tax payments.

The first is because if you were working for a large corporation someone else would be taking money out from you and making those payments. So, because you’re self employed and there’s no one else doing it for you, they want you to do it; kind of a self reporting.

The second is more selfish. They want your money so they can earn interest off it instead of letting you do it, if you were predisposed to do so. This makes more sense because our government always seems to be in a deficit, so it needs to find other ways to generate income. Also, they know that not many employees know that they can actually add more than just the number of dependents in their family and, in essence, pretty much hold onto all of their money until tax time. This means individuals and families can do what the government does; it’s just riskier doing things that way.

The truth is that it makes sense to make some kind of payments, but how much? This one I can’t answer for you because it depends on a number of factors. One is your income. Another is your expenses. The last is how your income is generated.

Income itself is easy enough. You might know that you’re going to make a specific amount based on the previous year, thus it’s easy to estimate how much you might want to pay each quarter.

Expenses is a wild card because often smaller business generate income but because of expenses run their business officially at a loss. In these instances the business might not have to make any tax payments at all or minimal, and you end up getting money back or having your accountant tell you that you’re good. However, it’s dicey because even in a normal year you might have to buy some expensive equipment that helps your bottom line, or maybe you have lots of travel expenses this year as opposed to the previous year, even though your income is the same.

How your income is generated is another tough one to deal with. If your income is project based, it’s possible that maybe you get two large contracts a year that last only a couple of months each time. This means you might want to make two large payments a year instead of something every quarter, or maybe you figure out what your normal yearly income is and spread out the payments. But what if you get one less contract or fit one more in? The fewer contracts might mean you paid too much, the more contracts might mean you didn’t pay enough, in which case the IRS tells you to figure out your income again and make adjustments.

What are the penalties? Who knows? Truthfully, unless you’re making six figures on a consistent basis there probably won’t be any penalties at all. Also, if your business often runs at a loss you probably won’t have anything to worry about either. In either case, it pays to have an accountant looking at your income on a regular basis and following their advice. They’re not going to steer you wrong because it would make them look bad, and their advice could keep you penalty free or even put money back in your pocket.

Those aren’t bad choices.
 

Ways To Track Expenses

If you’re in business or if you have a lot of expenses that you could possibly write off, you know you’ve had to deal with tracking expenses in many different ways. Most of us try to keep our receipts, which can be problematic because you could have tons, and they’re easy to lose. Therefore, here are some ideas you might want to think about to help with the process.

First, if you have a smartphone you can think about taking pictures of your receipts. These can be transferred to your computer electronically and you can create folders to put them in. Even if you lost your phone, you probably have your backup program set up to move everything to the cloud every night, so you’d be able to recover them pretty easily.

Second, pick one credit card and use it for all of your business expenses. This way, even if you miss receipts you’ll have a record of your purchases all in one place. Some accountants would rather look at your credit card statements anyway, and if you decide to use your business debit card they can use your statement to help track your money for the year as well.

Third, you can still get receipts but either scan them all when you get home or purchase a receipt scanner, which will also turn all of your receipts into electronic files. This is nice and clean and, if you use one of those receipt scanners, you can categorize everything so that your accountant more easily knows where everything should go. Of course the problem with this one is you have to find the time to scan everything, because few people get home and immediately scan.

Those are some ideas you might not have thought of. If none of those work for you… at least put all of your receipts in one place so you’re not chasing them all over the house, especially your big purchases. 😉