Tax estimates from your tax preparer: What they are and what to do about them
Whose prior year tax return is done? Yours? Great! When it was completed, did your tax preparer give you a list of “estimates” and tell you to pay them? Awesome! But what are estimates? And what exactly am I supposed to do with these numbers?
That’s a great question, and I’m glad you asked. To answer it, let’s review the two ways to pay your taxes:
Via withholding on your paycheck (for W-2 employees)
Via “estimated tax payments.” These are payments sent electronically to the IRS from an individual, usually a 1099 contractor or small business owner.
Once a tax return is finished, the software that was used to prepare the return will look at the amount of income you had, the amount of tax you paid, and whether you owed or got a refund. Then, it will make a recommendation based on how last year went. If you owed taxes in April, or if you didn’t have enough tax withheld through your paycheck, the software will print out “estimates.” These are amounts of tax that you need to pay in each quarter in order to not owe taxes next April. If you make these estimated payments on time, and if your financial situation is roughly the same as last year’s, you will probably not owe additional taxes next April.
That’s why they are called “estimates.”
Alright cool. But do I have to pay them?
The short answer to this question is no. They are not legally required to be paid. How much estimated tax you pay is your business. You can pay more, you can pay less.
What happens if I don’t pay them?
Well, now here comes the tricky part. You do not legally have to pay these estimates. However, if you don’t pay them, and also don’t have enough tax withheld from your paycheck (if you get one), you will probably owe taxes in April. (provided your financial situation is similar to last year’s) Also, if you don’t pay in enough taxes either way (withholding or estimates), the IRS will assess an underpayment penalty on your tax return. This is a penalty for not paying enough tax during the year. That’s just extra money you will owe the IRS and I don't know anyone who wants to pay the IRS extra.
How you can help
Working with your tax preparer, we can look at your current tax situation and compare it to last year’s. This will help you know if you should make any estimated payments this year and about how much they should be. By having your small business books up to date, you can take that information to your tax preparer and get a more accurate picture of where you are tax-wise before the year ends. This gives you time to do something about it so that you don’t owe taxes next April.
Do you find that keeping your books and quarterly estimated taxes in order is difficult? That’s where I can help! Let me and my team manage your books so that they are in great shape when you’re trying to do tax payments or meet with your tax preparer.