Paying Quarterly Estimated Taxes

The IRS finally caught up to legendary mob boss Al Capone in 1931 for tax evasion. After his brother, Ralph "Greasy Finger" 🤢 Capone was convicted the year prior, Al decided that he would have his lawyers scramble to make an offer to the IRS to pay income tax, as he had paid none in 1928 and 1929. The lawyers worked quickly, and drafted letters claiming he had income of $100,000 in each of those years (equal to $1.7m in today's money). They basically said, "ok IRS, you win, we'll pay! Here's how much he made." The problem in doing so, was that they handed evidence of earned income without proof of origin on a silver platter to the IRS, vis a vis, the FBI. Sending in the letters to negotiate the bill was all it took, and the rest is history.

The moral of this story then, is to pay your taxes in the correct amounts, and at the correct due dates, or you will go to Alcatraz and get Syphilis like Capone.

-Just kidding, but hopefully you knew that.

Beyond avoiding criminal activity diversified across a variety of industries, your best bet of staying out of trouble with the IRS is to pay what you owe when you owe it. Instead of Alcatraz, Entrepreneurs, Business Owners, and 1099 contractors paid an average of 7.25% in penalties on top of their tax bill last year due to under or late paying their quarterly estimates.

How to lower your bills

The IRS offers two ways to stay compliant with your quarterly taxes:

1. Owe less than $1,000 at annual tax time.

2. Pay at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less.

As these are simply reflections of your annual tax bill on a quarterly basis, the strategies of good tax planning are pretty similar, but it helps to know your cash flow from one year to the next. Perks for small business owners like Schedule 179 can be useful for offsetting a good amount of profit with a large expense, especially if used tactically in regards to paying your estimated taxes. You can even adjust your withholding WAY up on your W4 if you are an employee to get out of having to pay estimated quarterly bills, on account of outside income triggering it. Finally, you can also prepay your quarterlies if your heart desires and your cash flow provides: the IRS is always ready to take your money early. After all, somebody has to pay the Federal Government "$38m to fight seaweed growth in the state of Virginia." (That happened last year)

There are lots of small, niche ways of using the quarterly payment system to your advantage, and you would do well to ask your competent tax advisor for more. But overall the best and most simple way to keep your tax expense lower every three months is to just pay the right amount in a timely manner, and avoid penalties.

Anything more granular than that (and it does exist) greatly depends upon your situation and needs help from a good tax professional. Look for someone with a CPA or EA designation and experience working with business owners. Ideally, your financial planner has already been nudging you to have that chat with your accountant for years.

Great, but do I have to pay?

This is all fine and dandy advice, for those of you who know you are subject to paying estimated taxes. But the most common question I hear from newer business-owners is, "do I have to pay quarterly taxes now?" You must file quarterly taxes if all of the following are true:

1. You have income that does not automatically have federal taxes withheld. (here's looking at you 1099'ers, small business owners, and Landlords!)

2. You expect to owe more than $1,000 in taxes when the end-of-year return is filed.

Also, as was the case with Al Capone, you are likely to need to file quarterly taxes if you owe taxes from a prior year.

Even if you own a small business, you might be exempt from quarterly taxes. If you meet the below three criteria, you might not have to pay estimated taxes throughout the current tax year:

1. You had no tax liability for the previous tax year.

2. You were a U.S. citizen or resident alien for all of the prior year.

3. Your prior year tax covered a 12-month period.

I like to think of this "Safe Harbor" rule, as it is known, as the, "Stay-at home dad's side hustle never gets off the ground" rule, to make it easier to remember. Sure, some businesses can get this special treatment, but if you are in such a critical condition that you meet the terms above, then your tax advisor is probably keenly aware of your situation and will let you know, hopefully. You do not want to qualify for this.

Finally, the schedule on when to pay such quarterly estimated taxes is as follows:

January 1 – March 31 April 15

April 1 – May 31 June 15

June 1 – August 31 September 15

September 1 – December 31 January 15* of the following year. *See January payment in Chapter 2 of Publication 505, Tax Withholding and Estimated Tax

Fiscal Year Taxpayers If your tax year doesn't begin on January 1, see the special rules for fiscal year taxpayers in Chapter 2 of Publication 505

Farmers and Fishermen See Chapter 2 of Publication 505

Conclusion

In closing, work with a great tax professional and don't try to go it on your own. If I've said it once, I've said it a thousand times when it comes to taxes and governmental regulations on finance. If you suspect you may need to pay quarterlies, or that your may be under/overpaying, don't wait, email your accountant today. If they don't have any ideas and strategies on how to lower your tax bills, talk to your CERTIFIED FINANCIAL PLANNER™ who is well-trained to know a thing or two about this. Make sure to thank them, and then ask for a trusted referral to a new accountant.